Market Power and the Macroeconomy

The former Reserve Bank of India (RBI) deputy governor Viral Ach­arya’s views of a sharp rise in ind­ustrial concentration in India assume importance on various counts. He pointed out that this concentration led by five major industrial conglomerates allowed them to charge higher prices than their competitors, leading to persistent core inflation (Acharya 2023). According to him “the Big 5 are able to charge product prices that are substantially higher than other competitors in the market.” The presence of such substantial market power has implications which are not limited to the inflationary process and has a bearing on the overall macroeconomic performance.

The existence of market power implies imperfect competition in the markets. The consequences of imperfect competition have long been recognised in many areas of economics, mostly in industrial economics. Despite the clear divergence of product markets from the textbook models of perfect competition, most macroeconomic models using ­micro-foundations have tended to assume market-clearing perfectly competitive markets. Over the last quarter century, a shift has begun away from the excessive focus on perfect competition-based models towards more realistic models where firms may be strategic agents. This new approach has highlighted the importance of understanding the extent of market imperfections in designing pragmatic macroeconomic policies and asse­ssing their welfare outcomes. Viewed against this backdrop, the former RBI deputy governor’s observations are akin to a candid admission of the irrelevance of some of the conventional macromodels used in policy analysis.