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

Author

Listed:
  • Jesús Fernández-Villaverde
  • Federico Mandelman
  • Yu Yang
  • 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.

Suggested Citation

  • Jesús Fernández-Villaverde & Federico Mandelman & Yu Yang & Francesco Zanetti, 2021. "The "Matthew Effect" and Market Concentration: Search Complementarities and Monopsony Power," CESifo Working Paper Series 8897, CESifo.
    • Handle: RePEc:ces:ceswps:_8897
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    Cited by:

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    2. Ghassibe, Mishel & Zanetti, Francesco, 2022. "State dependence of fiscal multipliers: the source of fluctuations matters," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 1-23.
    3. Le Xu & Yang Yu & Francesco Zanetti, 2024. "The Adoption and Termination of Suppliers over the Business Cycle," Economics Series Working Papers 1040, University of Oxford, Department of Economics.
    4. 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.
    5. Hashmat Khan & Konstantinos Metaxoglou, 2021. "The Behavior of the Aggregate U.S. Wage Markdown," Carleton Economic Papers 21-06, Carleton University, Department of Economics.
    6. Ernst Ekkehard & Feist Lisa, 2024. "Tomorrow at Work: The Age of Shortages," Intereconomics: Review of European Economic Policy, Sciendo, vol. 59(3), pages 125-131.
    7. Xu, Le & Yu, Yang & Zanetti, Francesco, 2024. "The Adoption and Termination of Suppliers over the Business Cycle," CEPR Discussion Papers 18976, C.E.P.R. Discussion Papers.

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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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