Seminar （Dept. of Trade Economics）

Theme：Large Firms and the Rising Share of Profits

Speaker：Mingzhi Xu (Peking University)

Coordinator：Zhiyuan Chen

Time：2021-05-12 16:00

Address：Room 309, Mingde Business Building

Language：Chinese/English

Abstract:

We examine the relationship between large firms and the rising profit share by building 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 markups and the profit share are 5% and 10% larger than those predicted by a model of a representative consumer. Furthermore, we find that the profit share has been increasing over time and that firm size and consumer heterogeneity both play a role in explaining the rise. We link firm size to consumer heterogeneity by showing that heterogeneity of geographic locations, retail stores, and taste accounts for 40% of the variation in product appeal, which is a key determinant of firm size. Finally, we show the relationship between product mix and consumer heterogeneity across firms. While smaller firms cater to the taste of few segments, typically the largest ones, larger firms exploit their wider scope to target a larger number of segments, both large and niche.