How are firms’ relative size and market power related? Using merged micro-data about producers and consumers, we show that a firm’s relative size is mainly related to its number of customers, while its market power is associated only with average sales per customer. We study the macroeconomic implications of these facts by developing a firm dynamics model with customer acquisition and endogenous markups. By allowing firms to grow through customer acquisition, our model associates higher concentration at the top of the productivity distribution with a lower aggregate markup. Nonetheless, our quantitative analysis reveals (1) higher markup dispersion relative to conventional models and (2) large welfare and efficiency losses due to misallocation of customers across firms. By concentrating customers among more productive firms, the efficient allocation achieves 10.8% higher aggregate productivity, 14.6% higher output, and 13.6% higher welfare than the equilibrium allocation.

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