Firm Market Power in Intermediate Input and Labor Markets

In order to understand the nature of firm market power in intermediate input and labor markets, we study the determinants of the prices that firms pay for their inputs. To do this, we use uncommonly rich and highly disaggregated administrative data for firms in the textile sector in the Brazilian state of São Paulo for the period 2011 to 2017. First, we use data on business-to-business transactions that, unprecedentedly, includes information on transaction-specific prices for every purchase of intermediate inputs. Second, we use data on firm employment levels and wages for different occupation-education categories. The fine granularity of the data allows us to control for unobserved product and worker characteristics, imposing less stringent identification assumptions to uncover the existence and determinants of market power of firms in input markets. We find evidence of market power, but in forms that differ from the ones documented by the mainstream monopsony literature. For intermediate inputs we find three drivers of prices. First, firms buying larger quantities enjoy lower prices as a result of quantity discounts. Second, buyers relying less intensively on a given supplier pay lower prices. And third, buyers pay higher prices for the same input after receiving a positive demand or productivity shock, which is consistent with a rent-sharing mechanism and casts doubt on the validity of standard instruments employed in the literature to identify a residual supply curve. Regarding labor, we do not find evidence of firms needing to pay higher wages to hire more workers. Moreover, we show that firms increase wages after receiving a positive shock, questioning again the validity of usual instruments to study monopsony in labor markets. These results highlight the existence of market power of firms in the access to inputs, and how its complexity requires a more thorough approach to fully understand its nature, determinants and implications than previously considered