Working Paper

Growing by the Masses - Revisiting the Link between Firm Size and Market Power

Hassan Afrouzi, Andres Drenik, Ryan Kim
CESifo, Munich, 2020

CESifo Working Paper No. 8633

How are a firm’s size and market power related to one another? Combining micro-data about producers and consumers, we document that while firms mainly grow by selling to more customers, their markups are only associated with their average sales per customer. To study the macroeconomic implications of these facts, we develop a model of firm dynamics with endogenous customer acquisition and variable markups. Relative to a model without customer acquisition, our model generates higher concentration at the top, but a lower aggregate markup. Our quantitative analysis reveals large welfare and efficiency losses due to (mis)allocation of customers across firms. By increasing market concentration among the most productive firms, the efficient allocation achieves 11% higher aggregate productivity and 15% higher output.

CESifo Category
Fiscal Policy, Macroeconomics and Growth
Keywords: customer acquisition, misallocation, concentration, markups
JEL Classification: D240, D420, D610, E220