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Revisiting the effect of search frictions on market concentration

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 but strong assumptions: that all agents share the same ranking of firms, and that agents meet all firms, whether small or large, at the same rate. We build a random search model in which we relax those two assumptions and show that the intensity of search frictions has a non monotonic effect on market concentration. An increase in friction intensity increases market concentration up to a certain threshold of frictions, that depends on the slope of the meeting rate with respect to firm size. We leverage unique French customs data to estimate this slope. First, we find that in a range of plausible scenarios, search frictions intensity increases market concentration. Second, we show that slopes have increased over time, which unambiguously increases market concentration in our model. Overall, we shed light on the importance of the structure of frictions, rather than their intensity, to understand market concentration.

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