Firm Size, Market Power, and Competition in a Frictional Market

RePEc Short ID: ppi165
ORCID iD: 0000-0002-5989-4999

Kannan, Bharadwaj; Pinheiro, Roberto; Siedlarek, Jan-Peter

doi:10.26509/frbc-wp-202633

Working Paper

Firm Size, Market Power, and Competition in a Frictional Market

Abstract: We study how firm size and market concentration drive price dispersion and margins in a market with information frictions. We start from the noisy-search framework and tie firm size to the number of establishments owned by a firm. Consumers sample establishments rather than firms, allowing multi-establishment firms to capture even informed consumers. This benefit comes at a cost to the firm, since establishments cannibalize each other's demand. We show that uniform pricing across a firm's establishments is optimal. The unique equilibrium involves price distributions with supports connected and nested by firm size: larger firms post prices over a wider support, but earn lower profit per establishment. Finally, mergers can increase concentration while reducing expected transaction prices and markups when the merger does not create a new market leader. When the merger creates a new largest firm, its effect can instead reverse, depending on the relative strength of the concentration and largest-firm channels. Thus, the effect of greater concentration depends critically on how ownership changes the firm size distribution.

JEL Classification: D43; D83; L13;

https://doi.org/10.26509/frbc-wp-202633