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

47 Pages Posted: 3 Jul 2023 Last revised: 17 Jul 2023

See all articles by Hassan Afrouzi

Hassan Afrouzi

Columbia University

Andres Drenik

University of Texas at Austin

Ryan Kim

Johns Hopkins University

Date Written: June 2023

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.

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Suggested Citation

Afrouzi, Hassan and Drenik, Andres and Kim, Ryan, Concentration, Market Power, and Misallocation: The Role of Endogenous Customer Acquisition (June 2023). NBER Working Paper No. w31415, Available at SSRN: https://ssrn.com/abstract=4497996

Hassan Afrouzi (Contact Author)

Columbia University ( email )

Andres Drenik

University of Texas at Austin ( email )

2317 Speedway
Austin, TX Texas 78712
United States

Ryan Kim

Johns Hopkins University ( email )

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

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