Discussion paper
DP19099 Investment-Goods Market Power and Capital Accumulation
We develop a model of capital accumulation in an economy that imports investment goods from large firms with market power. We model investment-goods producers as a dynamic oligopoly and characterize the equilibrium with a Generalized Euler Equation. We use this characterization to analyze the evolution of investment and prices. The markup on investment goods acts as an endogenous adjustment cost, which decreases as the economy grows. We calibrate the model to simulate the post-2020 shocks to demand for semiconductors. The model attributes the equipment-price increase mainly to increasing marginal costs. Finally, we analyze policy interventions to address market power.
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