DP14881 Dynamics of Markups, Concentration and Product Span
We develop a model with a finite number of multi-product firms that populate an industry
together with a continuum of single-product firms, and study the dynamics of this industry
that arises from investments in the invention of new products. Consistent with the available
evidence, the model predicts rising markups and concentration and a declining labor share. We
then examine the dynamics of market shares and product spans in response to improvements in
the technologies of the multi-product and single-product firms, and the impact of these changes
on the steady state distribution of market shares and product spans. Our model predicts the
possibility of an inverted-U relationship between labor productivity and product span in the
cross-section of firms, for which we provide suggestive evidence. It also predicts that rising
entry costs of single-product firms may flatten the relationship between labor productivity and
market shares of the large multi-product firms.
