“Search Frictions, Market Power and Long Run Growth” by Chung-Yi TSE
University of Hong Kong
This paper embeds product market search in an Ak growth model to study the effects of search frictions on market structure, capital accumulation and long run growth. The analysis begins with the hypothesis that search frictions would give rise to market power, resulting in higher prices and lower output levels. In equilibrium, the falling demand for capital stemming from firms cutting back output would lower the interest rate, dampening capital accumulation and slowing down long run growth. A decline in search frictions should set the process in reverse, eventually speeding up growth through the change in market structure. In general equilibrium, it turns out that markups may not decline in response to a lowering of search frictions however. None the less, the interest rate would indeed go up, raising capital accumulation and long run growth. In the mean time, the stock market values of firms would fall.