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

Jesus Fernandez-Villaverde (), Federico Mandelman (), Yang Yu and Francesco Zanetti ()
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Yang Yu: Shanghai University of Finance and Economics

No 2103, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

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; monopsonypower in the labor market (search for similar items in EconPapers)
JEL-codes: C63 C68 E32 E37 E44 G12 (search for similar items in EconPapers)
Date: 2021-02
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Related works:
Journal Article: The “Matthew effect” and market concentration: Search complementarities and monopsony power (2021) Downloads
Working Paper: The "Matthew Effect" and Market Concentration: Search Complementarities and Monopsony Power (2021) Downloads
Working Paper: The ``Matthew Effect'' and Market Concentration: Search Complementarities and Monopsony Power (2021) Downloads
Working Paper: The “Matthew effect” and market concentration: Search complementarities and monopsony power (2021) Downloads
Working Paper: The "Matthew Effect" and Market Concentration: Search Complementarities and Monopsony Power (2021) Downloads
Working Paper: The “Matthew Effect” and Market Concentration: Search Complementarities and Monopsony Power (2021) Downloads
Working Paper: The “Matthew Effect” and Market Concentration:Search Complementarities and Monopsony Power (2021) Downloads
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