Authors: Jeremy Pearce and Liangjie Wu
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Staff Reports
Market Concentration and Aggregate Productivity: The Role of Demand
Number 1159
July 2025
July 2025
JEL classification: O31, O32, O34, O41, D22, D43
This paper studies the relationship between market concentration and aggregate productivity when firm-level demand emerges from past marketing investments. Granular firms may invest in demand both to complement their productivity and to amplify market power—this second force can create persistent mismatch between customer capital and productivity. The importance of this mismatch depends on the relative persistence of productivity and demand. Empirically, we find that demand is more persistent than productivity, implying a sizable role for mismatch. This leads to sluggish demand-side adjustment in the face of productivity shocks in the quantified model. Policies targeting static markup distortions—such as production subsidies—can exacerbate excessive marketing and thus are subject to a tradeoff between static gains and dynamic losses.
Author Disclosure Statement(s)
Jeremy Pearce
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Liangjie Wu
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Liangjie Wu
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Pearce, Jeremy, and Liangjie Wu. 2025. “Market Concentration and Aggregate Productivity: The Role of Demand.” Federal Reserve Bank of New York Staff Reports, no. 1159, July. https://doi.org/10.59576/sr.1159
Pearce, Jeremy, and Liangjie Wu. 2025. “Market Concentration and Aggregate Productivity: The Role of Demand.” Federal Reserve Bank of New York Staff Reports, no. 1159, July. https://doi.org/10.59576/sr.1159
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