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

89 Pages Posted: 20 Oct 2020

See all articles by Hassan Afrouzi

Hassan Afrouzi

Columbia University

Andres Drenik

The University of Texas at Austin

Ryan Kim

Johns Hopkins University

Multiple version iconThere are 2 versions of this paper

Date Written: 2020

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.

Keywords: customer acquisition, misallocation, concentration, markups

JEL Classification: D240, D420, D610, E220

Suggested Citation

Afrouzi, Hassan and Drenik, Andres and Kim, Ryan, Growing by the Masses - Revisiting the Link between Firm Size and Market Power (2020). CESifo Working Paper No. 8633, Available at SSRN: https://ssrn.com/abstract=3715285

Hassan Afrouzi (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Andres Drenik

The University of Texas at Austin ( email )

United States

HOME PAGE: http://www.andresdrenik.com

Ryan Kim

Johns Hopkins University ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

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