Working Paper: NBER ID: w31415
Authors: Hassan Afrouzi; Andres Drenik; Ryan Kim
Abstract: This paper explores how different margins of market share are related to markups. Using merged microdata on producers and consumers, we document that a firm’s market share is mainly related to its number of customers, while its price-cost markup is associated only with its average sales per customer. We develop a new model that reflects this empirical evidence and the endogenous nature of customer acquisition. When calibrated, this model predicts a higher degree of markup dispersion, which suggests greater efficiency losses due to customer misallocation. An analysis of the efficient allocation in this model reveals that compared with the equilibrium, aggregate TFP and output are 10.8% and 14% higher, respectively.
Keywords: market power; customer acquisition; markup dispersion; efficiency losses; misallocation
JEL Codes: D24; D43; D61; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm's market share (L10) | number of customers (C69) |
| average sales per customer (M31) | price-cost markup (D40) |
| misallocation of customers (D26) | efficiency losses (D61) |
| misallocation of demand (R22) | welfare losses (D69) |