Information Technology and Industry Concentration

James E. Bessen, "Information Technology and Industry Concentration," Boston Univ. School of Law, Law and Economics Research Paper, June 2019, https://papers.ssrn.com/sol3/papers.cfm"...It is sometimes argued that information technology “levels the playing field” by providing inexpensive tools to small and young firms. This paper finds that much of the impact of IT may be to tilt the playing field in favor of those firms who are able to use it most effectively. The use of IT systems is strongly associated with industry concentration across a wide range of sectors.Moreover, the magnitude of the link between industry IT systems use and concentration is large enough to account for much of the recent rise in industry concentration. Instrumental variable regressions provide some support for the notion that this relationship is causal, consistent with a view that IT generates a growing gap between the most productive firms and the rest.This view is further supported by evidence that IT systems use is associated with enhanced performance of the top firms within each industry. IT systems use is associated with relatively greater plant size among the top four firms, with relatively greater revenue per employee at these firms, and with higher firm operating margins, especially for the largest firms. These findings suggest that IT contributes to a widening productivity gap between the top firms and the rest, driving an increase in industry concentration. On the other hand, the observed increases in concentration are fairly modest. There are, of course, well known examples where IT facilitates highly concentrated markets as with Amazon’s dominance in e-commerce. These cases may be described as “winner-take-all” markets. But the markets in this study show much lower levels of concentration and relatively small increases. While economies of scale or network effects might be at play in the markets studied here, it appears that there are limits to such scale effects. These are “winnertake-a-bit-more” markets. Perhaps more narrowly defined markets would be more likely to exhibit “winner-take-all” competition, but the market definitions used here from the Economic Census (at the 6-digit NAICS and higher level of aggregation) are the markets that have raised concern about growing concentration. The findings of this paper suggest that much of the recent rise in industry concentration and much of the rise in firm operating margins can be attributed to the deployment of proprietary IT systems. A general decline in competition might also play a role in rising concentration and profits, but the evidence found here regarding competition is mixed. Merger and acquisition activity seems unrelated to industry concentration and the residual time trend in operating margins is negative once intangible investments are taken into account. On the other hand, greater Federal regulation is associated with higher operating margins, although this effect is substantially smaller than the role of IT systems.Overall, the analysis here suggests that the recent overall rise in industry concentration is not mainly the result of anticompetitive activity that should worry antitrust authorities. Indeed, IT systems use appears to bring real social economic benefits in terms of greater output per worker even if it does raise industry concentration. While there may be other reasons to question antitrust policies (see, for instance, Kwoka 2012), the general rise in industry concentration does not appear to raise troubling issues for antitrust enforcement at this point by itself. However, the evidence about the role of IT in raising industry concentration does broach another concern. Why aren’t the productivity gains from IT shared more broadly beyond the top firms? Increasingly, it seems, top performing firms utilize new technologies productively while their rivals do not. Concentration appears to be rising because of “barriers to technology” if not actually barriers to entry. More research is needed to understand exactly how IT is related to the growing productivity gap. Top firms might be able to use patents and trade secrets to prevent the spread of new knowledge. Or perhaps, instead, top firms are better able to recruit and develop talented managers and workers skilled at working with the new systems. Whatever the cause, the issue is important because the slow diffusion of new technologies might be related to sluggish aggregate productivity growth (Decker et al. 2017). Also, growing disparity in firm productivity might be related to growing inter-firm wage inequality. But the policies to address these issues, whether antitrust or other, depend very much on the diagnosis...."