Revisiting the Effect of Search Frictions on Market Concentration

Abstract
Search frictions can impede the formation of optimal matches between consumer and supplier, or employee and employer, and lead to inefficiencies. This paper revisits the effect of search frictions on the firm size distribution when challenging two common assumptions: that all agents share the same ranking of firms, and that agents meet all firms, whether small or large, at the same rate. Previous research has shown that agents, such as consumers and employees, may have different views on firms: for example, workers may prefer certain employers, and consumers may prefer certain suppliers. At the same time, we provide empirical evidence that the rate at which agents meet firms depends on the firm's size. We give theoretical evidence that, in presence of heterogeneous agents preferences, higher search frictions can lead to a higher market concentration, depending on the slope at which the meeting rate increases in the firm’s size. We empirically document the evolution of this slope over time and suggest that it may be a plausible explanation for the recent increase in market concentration. Our results challenge the common view that the existence of frictions allows the least-efficient firms to survive, and suggest that an increase in market concentration may not necessarily be a sign of a gain in efficiency. Joint paper with Berengere Patault.