Large Firms, Consumer Heterogeneity and the Rising Share of Profits

Abstract

We examine the relationship between large firms and the rising profit share in a model that features oligopolistic competition and consumer heterogeneity. Conditional on the sales distribution, the presence of consumer heterogeneity increases the profit share because it increases firm-level markups. Using data on purchases at the household-barcode level from Nielsen, we quantify the role of consumer heterogeneity, finding that the aggregate markup and the profit share are 8 and 3 percentage points larger than those predicted by a model of a representative consumer. Furthermore, we find that the profit share has been increasing over time and that firm targeting of consumer types plays a role in explaining this rise.

Keywords: Firm Heterogeneity, Multiproduct firms, Consumer Heterogeneity, Scanner data

JEL Classification: D12, L11, L25, O51