The 'Matthew Effect' and Market Concentration: Search Complementarities and Monopsony Power

58 Pages Posted: 18 Feb 2021

See all articles by Jesús Fernández-Villaverde

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Federico Mandelman

Federal Reserve Bank of Atlanta

Yang Yu

Shanghai University of Finance and Economics - School of Economics

Francesco Zanetti

University of Oxford

Date Written: February 18, 2021

Abstract

This paper develops a dynamic general equilibrium model with heterogeneous firms that face search complementarities in the formation of vendor contracts. Search complementarities amplify small differences in productivity among firms. Market concentration fosters monopsony power in the labor market, magnifying profits and further enhancing high-productivity firms’ output share. Firms want to get bigger and hire more workers, in stark contrast with the classic monopsony model, where a firm aims to reduce the amount of labor it hires. The combination of search complementarities and monopsony power induces a strong “Matthew effect” that endogenously generates superstar firms out of uniform idiosyncratic productivity distributions. Reductions in search costs increase market concentration, lower the labor income share, and increase wage inequality.

Keywords: Market concentration, superstar firms, search complementarities, monopsony power in the labor market

JEL Classification: C63, C68, E32, E37, E44, G12

Suggested Citation

Fernández-Villaverde, Jesús and Mandelman, Federico and Yu, Yang and Zanetti, Francesco, The 'Matthew Effect' and Market Concentration: Search Complementarities and Monopsony Power (February 18, 2021). CAMA Working Paper No. 22/2021, Available at SSRN: https://ssrn.com/abstract=3787787 or http://dx.doi.org/10.2139/ssrn.3787787

Jesús Fernández-Villaverde

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Federico Mandelman

Federal Reserve Bank of Atlanta ( email )

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Yang Yu

Shanghai University of Finance and Economics - School of Economics ( email )

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China

Francesco Zanetti (Contact Author)

University of Oxford ( email )

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Oxford, Oxfordshire OX1 4AU
United Kingdom

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