Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, January 7, 2021

Growing by the Masses: Revisiting the Link between Firm Size and Market Power

Growing by the Masses: Revisiting the Link between Firm Size and Market Power

Hassan Afrouzi

Columbia University

Andres Drenik

Columbia University

Ryan Kim

Johns Hopkins University

Abstract

How are a firm’s size and market power related to one another? Combining micro-data about producers and consumers, we document that while firms mainly grow by selling to more customers, their markups are only associated with their average sales per customer. To study the macroeconomic implications of these facts, we develop a model of firm dynamics with endogenous customer acquisition and variable markups. Relative to a model without customer acquisition, our model generates higher concentration at the top, but a lower aggregate markup. Our quantitative analysis reveals large welfare and efficiency losses due to (mis)allocation of customers across firms. By increasing market concentration among the most productive firms, the efficient allocation achieves 11% higher aggregate productivity and 15% higher output.

https://lawprofessors.typepad.com/antitrustprof_blog/2021/01/growing-by-the-masses-revisiting-the-link-between-firm-size-and-market-power.html

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