Inequality : A Hidden Cost of Market Power

This paper explores the impact of competition on inequality by developing a new model to illustrate how higher profits from market power, and associated higher prices, could influence the distribution of wealth and income. We analyse data from eight OECD countries – Canada, France, Germany, Korea, Japan, Spain, the United Kingdom and the United States. In an average country in the sample, market power increases the wealth of the richest 10% by between 12% and 21% for a range of reasonable assumptions about savings behaviour, while it reduces the income of the poorest 20% by between 14% and 19%. The results contribute to the economic literature on the origins of inequality, suggesting that competition may help to reduce economic inequality