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The “Matthew effect” and market concentration: Search complementarities and monopsony power

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  • Fernández-Villaverde, Jesús
  • Mandelman, Federico
  • Yu, Yang
  • Zanetti, Francesco

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.

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  • Fernández-Villaverde, Jesús & Mandelman, Federico & Yu, Yang & Zanetti, Francesco, 2021. "The “Matthew effect” and market concentration: Search complementarities and monopsony power," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 62-90.
    • Handle: RePEc:eee:moneco:v:121:y:2021:i:c:p:62-90
    DOI: 10.1016/j.jmoneco.2021.04.005
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    More about this item

    Keywords

    Market concentration; Superstar firms; Search complementarities; Monopsony power in the labor market;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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