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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

No 2021-4, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

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 the output share of high-productivity firms. The combination of search complementarities and monopsony power induce 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. The model also transforms short-lived negative aggregate shocks into persistent recessions that heighten market concentration.

Keywords: market concentration; superstar firms; search complementarities; monopsony power in the labor market (search for similar items in EconPapers)
JEL-codes: C63 C68 E32 E37 E44 G12 (search for similar items in EconPapers)
Pages: 57
Date: 2021-01-15
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (15)

Published in 2021

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https://www.frbatlanta.org/-/media/documents/resea ... -monopsony-power.pdf (application/pdf)

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
Working Paper: The “Matthew Effect” and Market Concentration:Search Complementarities and Monopsony Power (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:89581

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DOI: 10.29338/wp2021-04

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