Firm Size, Market Power, and Competition in a Frictional Market

Bharadwaj Kannan, Roberto Pinheiro and Jan-Peter Siedlarek

No 26-33, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We study how firm size and market concentration drive price dispersion and margins in a market with information frictions. We start from the noisy-search framework and tie firm size to the number of establishments owned by a firm. Consumers sample establishments rather than firms, allowing multi-establishment firms to capture even informed consumers. This benefit comes at a cost to the firm, since establishments cannibalize each other's demand. We show that uniform pricing across a firm's establishments is optimal. The unique equilibrium involves price distributions with supports connected and nested by firm size: larger firms post prices over a wider support, but earn lower profit per establishment. Finally, mergers can increase concentration while reducing expected transaction prices and markups when the merger does not create a new market leader. When the merger creates a new largest firm, its effect can instead reverse, depending on the relative strength of the concentration and largest-firm channels. Thus, the effect of greater concentration depends critically on how ownership changes the firm size distribution.

Keywords: search frictions; market power; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: D43 D83 L13 (search for similar items in EconPapers)
Pages: 103 pages
Date: 2026-11-02
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DOI: 10.26509/frbc-wp-202633

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