Market Concentration and Aggregate Productivity: The Role of Demand

Jeremy Pearce and Liangjie Wu

No 1159, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper studies the relationship between market concentration and aggregate productivity when firm-level demand emerges from past marketing investments. Granular firms may invest in demand both to complement their productivity and to amplify market power—this second force can create persistent mismatch between customer capital and productivity. The importance of this mismatch depends on the relative persistence of productivity and demand. Empirically, we find that demand is more persistent than productivity, implying a sizable role for mismatch. This leads to sluggish demand-side adjustment in the face of productivity shocks in the quantified model. Policies targeting static markup distortions—such as production subsidies—can exacerbate excessive marketing and thus are subject to a tradeoff between static gains and dynamic losses.

Keywords: firm dynamics; productivity; demand; customer capital; market concentration; competition; innovation (search for similar items in EconPapers)
JEL-codes: D22 D43 O31 O32 O34 O41 (search for similar items in EconPapers)
Pages: 74
Date: 2025-07-01
New Economics Papers: this item is included in nep-com and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:101336

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DOI: 10.59576/sr.1159

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