Report

Market Concentration and Aggregate Productivity: The Role of Demand

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.

JEL Classification: O31; O32; O34; O41; D22; D43;

https://doi.org/10.59576/sr.1159

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2025-07-01

Number: 1159