Macroeconomic interactions between firms' market power and financial frictions

In recent years there has been a growing body of literature examining the effects firms' market power, following evidence of a rise since the 1980s. Although much research has been conducted to understand the macroeconomic effects of market power and financial frictions, their relationship remains insufficiently explored. This thesis investigates the macroeconomic interactions between firms' market power and financial frictions. The thesis is structured in two parts. The first part, comprising the first two chapters, examines the interaction between firms' market power stemming from common ownership structures and bankruptcy costs due to costly state verification. Our results show that when the probability of bankruptcy is sufficiently low, a higher concentration of common ownership reduces the number of bankruptcies, thus reducing the associated welfare costs. However, this reduction is more than offset by a reduction in aggregate welfare, resulting in a negative net effect. Conversely, when the probability of bankruptcy is high, the increase in market power has a positive effect on welfare, reducing the number of bankruptcies and thus the associated costs. The second part, represented by the third chapter, explores how financial frictions can create a mechanism through which a firm can accumulate market power. We develop a theoretical model in which firms invest in technology to improve product quality, thereby increasing their market power. The model reveals that firms with greater market power can invest more, reinforcing and accumulating additional market power in subsequent periods. However, the general equilibrium effects of reducing financial frictions are ambiguous. In particular, lower level of financial frictions enables firms to invest more and obtain higher markups, leading to an increase in aggregate average market power. At the same time, lower financial frictions may facilitate the entry of new firms into the market, increasing competitive pressure. Our results indicate that increased investment induced by reduced financial frictions does not necessarily increase competition unless it is accompanied by the entry of new firms. Through empirical analysis of data from U.S. publicly listed firms, we find that higher levels of market power in earlier periods are correlated with lower financial frictions in later periods.