Concentration, Market Power, and Misallocation: The Role of Endogenous Customer Acquisition

Concentration, Market Power, and Misallocation: The Role of Endogenous Customer Acquisition

 

 

Hassan Afrouzi

Columbia University

Andres Drenik

University of Texas at Austin

Ryan Kim

Johns Hopkins University

 

Abstract

This paper explores how different margins of market share are related to markups. Using merged microdata on producers and consumers, we document that a firm’s market share is mainly related to its number of customers, while its price-cost markup is associated only with its average sales per customer. We develop a new model that reflects this empirical evidence and the endogenous nature of customer acquisition. When calibrated, this model predicts a higher degree of markup dispersion, which suggests greater efficiency losses due to customer misallocation. An analysis of the efficient allocation in this model reveals that compared with the equilibrium, aggregate TFP and output are 10.8% and 14% higher, respectively.