Competition, Profit Share and Concentration

This paper investigates the distributional impact of ’winner-takes-most’ competition and its role in shaping recent macroeconomic trends in advanced economies. We document a positive correlation between variations in industry labor and capital shares, and a positive correlation between variations in industry profit shares and industry concentration levels. However using micro-based industry data on firm-level profit margins, we find a negative correlation between industry concentration and a wide range of moments from the distribution of profit shares. We propose a dynamic general equilibrium model with heterogeneous firms, in which an increase in competition, whereby consumers become more price-sensitive and firm markups decrease, leads to a rise in concentration, a decrease in firm-level profit shares but an increase in industry-level profit shares. We study the effect of a change in the competitive environment on the Balanced Growth Path (BGP). In contrast with representative firm models, competition reduces the probability of successful entry and product diversity. If consumers value product diversity, we show that output growth, the natural interest rate, and welfare decrease with competition.