The Effects Of Market Power On Inequality

By Sean F. Ennis, Pedro Gonzaga & Chris Pike

Market power has generally not received much recognition as a potential source of inequality. This paper describes a mechanism by which income inequality can be exacerbated by market power, and provides a characterization of the impact of market power on income of the top 10 percent of income earners and the bottom 90 percent. For an illustrative 10 percent mark-up from market power, across 12 countries, we model a decline of purchasing power of about USD 1,600 for the bottom 90 percent and an increase in income of the top 10 percent of income earners of USD 14,400. Such figures illustrate overall impacts, and would then need to be reduced to calculate the impact of illegitimate market power, given that much market power is legitimate, coming from IP rights or competitive business decisions.