Working Paper

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

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;

JEL Classification: C63; C68; E32; E37; E44; G12;

Status: Published in 2021

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Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2021-01-15

Number: 2021-4