Firm Heterogeneity, Market Power and Macroeconomic Fragility

Thu, 01 Jan 2026 00:00:00 +0000

Ferrari and Queirós ask why US recoveries have become progressively slower and argue that rising firm heterogeneity and market power — well-documented long-run trends — can substantially increase the probability that a moderate aggregate shock triggers a quasi-permanent slump rather than a transitory recession. They call this probability macroeconomic fragility.

The theoretical framework is an RBC model with oligopolistic (Cournot) competition, endogenous firm entry, and elastic capital and labor supply (GHH preferences). The economy consists of many product markets; within each market, firms with heterogeneous idiosyncratic TFP compete in quantities, with the marginal firm earning zero net profit. A central complementarity drives the results: more competition raises factor shares and factor prices, which expands factor supply, which in turn allows more firms to enter, sustaining high competition. This complementarity can generate multiple stochastic steady-states — a high-competition, high-output regime and a low-competition, low-output regime.

Alessandro Ferrari | Macro Paper Warehouse

Firm Heterogeneity, Market Power and Macroeconomic Fragility