Productivity, competition, and market outcomes

Abstract At the firm level, productivity is constantly evolving because of the introduction of new technology and innovations. Some of these productivity gains diffuse uniformly across firms, while others only spread out in the industry with time. The unequal evolution of productivity impacts the structure of the industry, the more the greater the degree of competition. We analyze the relationship between the distribution of firms’ productivity advantages and the distribution of market shares and show that this relationship is more intense with more competition. We briefly comment on two applications: we show that because productivity gains, market concentration and inflation can be negatively related, and we give an alternative interpretation to the case for a recent rise of US markups attributed to increased market power.