Large Firms, Consumer Heterogeneity and the Profit Share

We examine the relationship between large firms and the profit share in a model that features oligopolistic competition and consumer heterogeneity.Conditional on the sales distribution, the presence of consumer heterogeneity increases the profit share because it increases firm-level markups.Using data on purchases at the household-barcode level from Nielsen, we quantify the role of consumer heterogeneity, finding that the average markup and the aggregate profit share are 20 and 6.4 percentage points larger than those predicted by a model of a representative consumer.Based on our evidence from 2004 to 2018, and extrapolating it to 1990 through 2021, we predict that the profit share in retailing could have increased by over 4 percentage points over this longer period due to rising income inequality across consumers.