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

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

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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  • Jesús Fernández-Villaverde & Federico Mandelman & Yang Yu & Francesco Zanetti, 2021. "The “Matthew effect” and market concentration: Search complementarities and monopsony power," CAMA Working Papers 2021-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2021-22
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    2. Hashmat Khan & Konstantinos Metaxoglou, 2021. "The Behavior of the Aggregate U.S. Wage Markdown," Carleton Economic Papers 21-06, Carleton University, Department of Economics.
    3. Xiwen Bai & Jesús Fernández-Villaverde & Yiliang Li & Francesco Zanetti, 2024. "The Causal Effects of Global Supply Chain Disruptions on Macroeconomic Outcomes: Evidence and Theory," Economics Series Working Papers 1033, University of Oxford, Department of Economics.
    4. Luca Gambetti & Dimitris Korobilis & John D. Tsoukalas & Francesco Zanetti, 2023. "Agreed and Disagreed Uncertainty," Working Paper series 23-01, Rimini Centre for Economic Analysis.

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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
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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