Oligopolistic Investment, Markups and Asset-Pricing Puzzles

Abstract

We analyze a multi-consumption good general equilibrium production-based asset pricing model with an oligopolistic sector that follows subgame perfect pricing, production, and capital investment strategies. The model is calibrated with U.S. aggregate and industry data from 456 manufacturing industries. The oligopoly model provides a better fit to product and asset markets' data compared to the benchmark competitive industry. In particular, under the "classical" assumptions of time-additive power utility and Markov shock structure, and assuming reasonable risk aversion, the model generates relatively high industry and aggregate equity premia and their volatilities, as well as Sharpe ratios. The model also fits well the volatility of industry investment and the cyclicality of price-cost markups. We find support for theoretical predictions on the link between industry competition and product and asset market outcomes.