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Department of Economics Seminar with Dr Anthony Savagar, University of Kent The welfare costs of distortions with imperfectly contestable markets
Abstract: We study the welfare implications of distortions, such as markups and returns to scale, when markets are imperfectly contestable. Contestability reflects the speed of profit arbitrage by entrants. First, we present evidence on differences in speed of firm entry adjustment across US industries. In some industries, such as hospitality, firms respond rapidly to profit opportunities, arbitraging quasi-rent quickly. Whereas, in other industries, such as construction, entrants respond slowly, sustaining incumbents' quasi-rents for longer. We develop a model of dynamic firm entry, which shows that the sluggishness of firm entry magnifies the welfare costs of distortions.