Markups, endogenous market power and misallocation in Turkey

Abstract

Analyzing firms’ market power and the related aggregate misallocation is one of the intriguing subjects of the macroeconomics research frontier. However, market power and misallocation are mostly treated as exogenous factors, and the literature mostly focus on the effects of the exogenous variation in misallocation on aggregate economic outcomes (Hsieh and Klenow (2009), Restuccia and Rogerson (2008), Fattal Jaef (2018)). Nonetheless, Peters (2020) built up a model with endogenous misallocation where firm’s market power is endogenously determined and via interrelated dynamics of the model, and the equilibrium distribution of markups emerges in the form of a Pareto distribution through which the impact of the market power can be explicitly observed. In this thesis, I will apply the model of Peters (2020) to Turkey, and I will use different samples in terms of the firm size and technology levels. The aim of this study is to reveal if there is any misallocation that is coming from potentially excessive level of market power, and to understand the implications of the market power in the aggregate outcomes. Furthermore, a counterfactual analysis will be done to understand what would happen if the entry barriers in Turkey become weaker, so that the Turkish economy will resemble a more competitive setting. Usually considered an emerging economy, this analysis will be fundamental to understanding the creative destruction related dynamics in Turkey.