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

Arbeitspapier

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.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 8897

Classification and Topics

• Classification: Wirtschaft ; Computational Techniques; Simulation Modeling ; Computable General Equilibrium Models ; Business Fluctuations; Cycles ; Prices, Business Fluctuations, and Cycles: Forecasting and Simulation: Models and Applications ; Financial Markets and the Macroeconomy ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: market concentration ; superstar firms ; search complementarities ; monopsony power in the labor market

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fernández-Villaverde, Jesús ; Mandelman, Federico ; Yu, Yang ; Zanetti, Francesco
• Event: Veröffentlichung
• (who): Center for Economic Studies and Ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/232494