Some of the dominant Superstar corporate economics

A body of evidence indicates that in recent decades, the leading firms in a given industry have achieved a more dominant position than in the past. I’ve noticed some of this evidence accumulated over time.

For example, in 2015, the Organization for Economic Co-operation and Development published a report on “The Future of Productivity,” arguing that problems of slowing productivity in many countries were occurring not because high-productivity firms slowed their productivity growth, but because firms with average and low productivity did not keep up. that. That year, Jae Song, David J. Price, Fatih Jovinen, and Nicholas Blum wrote how the pattern of differentiated productivity across firms also led to divergent wages between firms. They argued that within a given company, pay inequality hadn’t changed much. But some highly productive firms had profits significantly higher than others in the same industry, which was a major driver of the growing market disparity in labor income. Nicholas Blum summarized this evidence in a March 2017 cover story for Harvard Business Review.

The McKinsey Global Institute took charge in 2018 with a report that summarizes past evidence and presents new evidence in the 2018 report Superstars: The Dynamics of the Firms, Sectors, and Cities Driving the Global Economy (October 2018). It examines some 6,000 of the world’s largest public and private companies: “Over the past twenty years, the gap has widened between the privileged firms and the middle firms, and also between the middle firms and the bottom ten percent. … Thus the growth of economic profit at the upper end of the distribution is reflected in The bottom end is by increasing and increasingly persistent economic losses…” In 2019, the US Census Bureau and Bureau of Labor Statistics created an experimental database called the Statistics of Dispersion over Productivity, that allows researchers to look at how productivity is distributed across firms in a given industry: for example For example, firms in a given industry at the 75th percentile with productivity are about 2.4 times as productive as those firms at the 25th percentile, on average. Again, there has been some evidence that this gap is widening, and that best practice methods for improving productivity are not as prevalent as they once were.

In sum, the body of evidence indicates that the superiority of dominant firms over their competitors has increased in a variety of industries. Jan Eckhot reviews this evidence, and also examines the causes and effects, in his article on “Dominant Companies in the Digital Age” (UBS Center Public Paper #12, November 2022).

Eckhot argues that dominant corporate supremacy can be achieved in a number of ways in the digital age. I think the most well-known approach is the idea of ​​network effects. For example, many buyers go to Amazon because many sellers are also on Amazon, and vice versa. Once such a network exists, it can be difficult for a new company to gain a foothold.

A more accurate approach is for companies to make investments that fall under the SG&A accounting category. These include expenditures on research and development (R&D), advertising, salaries of directors, etc. and are often interpreted as fixed or intangible costs. The observed rise in SG&A is a source of economies of scale as a fixed cost of production leads to lower average costs even with moderate decreases in returns on variable inputs.” To put the point another way, some companies make large investments in technologies, brand names, and managers who They can build on these capabilities.Eckhot argues:

The rise of dominant companies that we have witnessed during the advent of the digital age is built on cost-cutting and efficiency-boosting innovations that create scaling returns. This means a winner-takes-all market with a dominant firm achieving a long-term monopoly position. While monopoly is often associated with higher prices, most of these firms achieve this situation by doing the opposite, i.e. lowering prices. They can do this because their innovation and investment drives costs down even further. This is why digital technology is so attractive to customers: Technological innovation is the champion. But as costs fall more than prices due to economies of scale, technological change is also the villain.

(For those interested in digging deeper here, the Summer 2022 issue of the Journal of Economic Perspectives includes a three-paper symposium on the growing importance of intangible capital in the American economy, including everything from innovations to brand names. The Summer 2019 issue includes a three-paper symposium On the question of how prices change on cost over time, and the implications for labor markets and the macroeconomy.As has been true for over a decade now, all JEP articles date back to the first issue. Available freelyFull disclosure: I serve as managing editor for JEP, and therefore am prepared to believe that Articles are of broader interest!).

As Eckhot points out, the potential consequences of this rise in dominant premium firms include increased wage inequality resulting from these permanent differences between firms; a slowdown in new startups as entrepreneurs face a more challenging environment; a shift in the flow of national income directed to capital rather than to labour; and, in general, greater ability for more dominant firms, and less interested competition, to charge higher prices.

What is the appropriate policy solution? One approach would be to impose higher taxes on the profits of the dominant firm, but without taking a position here on the extent to which this is desirable, it should be noted that higher taxes would not alter the dominance of these firms, and many negative consequences persisted.

An alternative approach might be to recognize the phenomenon, but take more of a hands-off attitude. After all, if dominant companies are finding success by making productivity-enhancing investments that reduce costs, that is broadly a desirable goal, not something to be punished. Besides, today’s dominant companies are not at risk, as anyone who tracks the current performance of Meta (Facebook) or Twitter can attest. Not so long ago, companies like America Online and MySpace seemed to have dominant positions.

In addition, to what extent are consumers “harmed” by, say, the free access to email, word processing, and spreadsheets offered by Google? Preston McAfee put it this way in an interview a few years ago:

First, let’s be clear about what Facebook and Google have a monopoly on: digital advertising. The exact phrase is to “exercise market power” rather than monopoly, but life is short. Both companies are giving up their consumer products; The product they are selling is advertising. While digital advertising may be a market for antitrust purposes, it is not in the top 10 social problems we face and probably not in the top thousand. Indeed, inasmuch as advertising is harmful to the consumers, monopoly, by increasing the price of advertising, brings social benefit.

Amazon operates many companies. In retail, Wal-Mart’s revenue is still twice as high as Amazon’s. In cloud services, Amazon pioneered the market and faces stiff competition from Microsoft, Google and some competition from others. In streaming video, they face competition from Netflix, Hulu, and segments like Disney and CBS. On top of that, there is a lot of great content being created; I conclude that the entry of Netflix and Amazon into content creation has been great for the consumer. …

A more proactive approach might be to look for targeted opportunities to ensure more competition. For example, McAfee suggests that consumers may be hurt in a meaningful way by the Android-Apple duopoly in the smartphone market, as well as by the very limited competition to provide home internet services.

Eckhot emphasizes the general issue of “interoperability”—that is, the ability of consumers to switch between companies. he is writing:

Interoperability has many applications. It is the regulation that ensures that a hardware producer cannot change the charger plug from product to product, forcing users to buy a new expensive plug every time, or whenever they need to replace an existing one. The concept of interoperability was at the heart of the Internet’s development as the founding fathers of the World Wide Web ensured access to various services. They ensure that an email message is sent for example from one provider (say Gmail) to someone else (such as your company’s email servers). Likewise with accessing web pages hosted by different providers. This generates a lot of income and competition among ISPs. But this concept of interoperability does not come without regulation. For example, interoperability is not inherent in messaging services. It is impossible to send a message from WhatsApp to Snapchat because the messaging services are closed. None of the services have an incentive to open their messaging platform to their competitors’ messages. As a result, compared to the number of email service providers and the World Wide Web, the number of messaging services is very small.

If people have to make a choice to move their personal information, or provide access to that information, from one setting to another, the competition can expand. This goal is not simple. But if people can transfer their past preferences and shopping lists, and even their financial and banking records and health data, from one provider to another, competition in a number of areas could become easier. Another suggestion is that antitrust regulators should be suspicious when a dominant firm seeks to buy smaller firms that have the potential to grow into large-scale competitors in the future.

A more proactive approach might bypass specific situations of anticompetitive behavior and seek to use antitrust regulation in more aggressive ways, perhaps even with the goal of breaking up dominant firms. I don’t see a strong argument for this kind of action. When the underlying problem is strong network effects, these effects will not go away. When the underlying problem is companies making significant investments to boost productivity, that’s a good thing, not a bad thing. Perhaps instead of figuring out how to slow down productivity leaders, we should think more about what kinds of market structures and institutions might help spread what they are already doing across the rest of the economy. Finding ways to raise laggards is often more difficult than demolishing leaders, but it’s also ultimately more productive.

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