Across industries and across countries, a small number of “superstar” firms are pulling away from the competition. They’re more productive, as the chart below illustrates. They’re also more profitable, more innovative, and they pay better. But why are these companies doing so well? Are they out-competing their rivals, or are they using their size and influence to avoid competition altogether?
One answer to that first question shows up in study after study: superstar firms are succeeding in large part due to information technology.
In a new paper, James Bessen of Boston University provides evidence of that linkage, and of its importance. He finds that the rise in industry concentration – the share of revenue captured by the top firms in a sector – is largely explained by the adoption of IT. His measure of IT better explains the rise in industry concentration than do measures of M&A or entrepreneurship.
Bessen compared measures of industry concentration from the U.S. Census to the share of workers in an industry in IT-related roles. (He excluded tech industries from the analysis since his aim was to study how IT adoption was helping firms, rather than industries that produce IT-related products.) Industries with a higher share of IT workers saw more concentration between 2002 and 2007, even after controlling for M&A activity and several other variables. In separate analyses, he links IT adoption to higher output per worker and higher profit margins. (He also finds some evidence linking lobbying to higher profit margins, but it appears to be less significant than IT adoption.)
Bessen’s findings are consistent with a lot of other data. Erik Brynjolfsson and Andrew McAfee reported a link between IT adoption and industry concentration in HBR in 2008; since then, multiple analyses have linked increased use of digital technology to higher profitability at both the industry and company level. Researchers at the OECD have documented the rise of superstar firms and their relationship to wage inequality, and found that use of IT is one of the primary drivers. Other academic research has found the same.
But why is IT leading to winner-take-all competition?…