ICYMI: Tech Trends Buck Concentration Narrative
In his latest, Jason Furman notes that there’s no one way to interpret increases in concentration, writing, “Concentration has increased for good reasons and for bad reasons.” Only by analyzing other trends in the economy and within individual sectors is it clear if increased concentration is beneficial or harmful for particular industries.
Happily, many of the negative phenomena that Furman notes sometimes correlate with increased concentration in the economy do not apply to the tech sector, which remains innovative and productive.
Furman asks what increased concentration does “to the incentives for business investment, for research and development, for productivity growth.” The tech sector is defined by constant innovation.
Fierce competition drives leading tech services to invest tremendous sums in R&D. “Technology has also changed the nature of competition. In numerous cases a company has seemed to have a dominant edge just before it slides into oblivion. Often the fatal threat comes not from a better version of the existing product but rather from companies offering new technology that delivers superior value.” (Joe Kennedy, “Understanding Antitrust,” RealClearPolicy, 10/30/18)
In fact, the tech industry leads global R&D spending:
An Oliver Wyman study finds deal value in the tech sector is at historically high levels, indicating a vibrant sector. “The global venture-investing market has seen broadly uninterrupted growth in total deal value since the dot-com crisis. The market is at record levels, with about $150 billion of venture investment in 2017, compared to about $55 billion prior to the dot-com crisis. Growth has come from both technology and other sectors, with technology experiencing marginally higher growth in recent years.” (“Assessing The Impact Of Big Tech On Venture Investment,” Oliver Wyman, 7/11/18)
Furman asks about the relationship between increased concentration and inequality. In the tech sector, PPI finds that concentration is not an issue and gross margins are falling and labor share of income is up, indicating strong competition.
In discussing concentration and competition, Michael Mandel writes that tech/telecom/ecommerce outperform the rest of the private sector. “The evidence does not indicate that the tech leaders pose a special problem. From the macro perspective, we find that the relative size of the tech/telecom/ecommerce leaders has barely changed since 2000. Revenues at the U.S. tech/telecom/ecommerce leaders did rise from 2000 to 2017 – but no faster than the expansion of the global economy. We also find that the tech/telecom/ecommerce sector has outperformed the rest of the private sector across a wide range of important economic measures since the tech boom started in 2007. Prices in the tech/telecom/ecommerce sector have fallen; productivity has risen much faster than the rest of the private sector; real wage growth has been higher; and job growth has been faster.” (Michael Mandel, “Competition And Concentration: How The Tech/Telecom/Ecommerce Sector Is Outperforming The Rest Of The Private Sector,” Progressive Policy Institute, 11/18)
PPI’s Michael Mandel references a 2017 paper by Carl Shapiro which noted economic performance matters more for antitrust than whether or not firms obtain “dominant positions.” “When assessing concentration and competition, economic performance matters. In particular, we care about economic variables such as prices, productivity, real wages, hiring and labor share. In a 2017 paper, Carl Shapiro warns that ‘the coherence and integrity of antitrust require that successful firms not be attacked simply because they obtain dominant positions.’ Or, to put it another way, we don’t want to trash an industry that is working really well for consumers and workers.” (Michael Mandel, “Competition And Concentration: How The Tech/Telecom/Ecommerce Sector Is Outperforming The Rest Of The Private Sector,” Progressive Policy Institute, 11/18)
PPI’s Michael Mandel finds the tech sector’s decreasing gross margins “is consistent with strong competition.” “These results suggest that benefits of productivity growth in the digital sector since 2007 are being shared with workers and customers. This is consistent with strong competition in the digital product and labor markets. By contrast, companies in the broader private sector are benefiting [sic] from lower labor share and higher gross margin, which suggest that market power is rising outside of the digital sector.” (Michael Mandel, “The Digital Sector: Rising Labor Share, Falling Gross Margin,” Progressive Policy Institute, 8/13/18)
Furman writes on network effects, efficiencies, and increased concentration. In the tech sector, however, because profits of “superstar firms” are fleeting, leading firms remain threatened by disruptive innovation.
Economists David Evans and Richard Schmalensee: “Multihoming” leads to high churn in the tech sector. “People can use multiple online communications platforms, what economists call ‘multihoming.’ A few people in a social network try a new platform. If enough do so and like it, then eventually all network members could use it and even drop their initial platform. This process has happened repeatedly. AOL, MSN Messenger, Friendster, MySpace, and Orkut all rose to great heights and then rapidly declined, while Facebook, Snap, WhatsApp, Line, and others quickly rose.” (David Evans and Richard Schmalensee, “Debunking The ‘Network Effects’ Bogeyman,” Regulation, Winter 17/18)
While gaps between “superstar” and “median” firms have widened, McKinsey Global Institute analysis finds that superstar firms continue to be displaced. “Superstar firms continue to be displaced from the top 10 percent and the top 1 percent. Indeed, some firms have risen from the bottom 10 percent to higher deciles—a few all the way to the top 10 percent. In each of the past two decades (corresponding to a business cycle), nearly 50 percent of all superstar firms fell out of the top 10 percent during the business cycle, and when they fell, 40 percent fell to the bottom 10 percent. The top 1 percent is also contestable, with two-thirds being new entrants to this top rank in the latest cycle. There is also some variation by sector and geography. Superstar firms from emerging economies, for instance, have a higher churn rate of 60 percent compared to 40 percent for firms from developed economies.” (“‘Superstars’: The Dynamics Of Firms, Sectors, And Cities Leading The Global Economy,” McKinsey Global Institute, 10/18)
James Bessen and Walter Frick link increased concentration to efficiencies from software adoption that leads to “faster technological progress.” “Most industries in the U.S. have grown more concentrated in the past 20 years, meaning that the biggest firms in the industry are capturing a greater share of the market than they used to. But why? Research by one of us (James) links this trend to software. Even outside of the tech sector, the employment of more software developers is associated with a greater increase in industry concentration, and this relationship appears to be causal. Similarly, researchers at the OECD have found that markups — a measure of companies’ profits and market power — have increased more in digitally-intensive industries. And academic research has found that rising industry concentration correlates with the patent-intensity of an industry, suggesting ‘that the industries becoming more concentrated are those with faster technological progress.'” (James Bessen and Walter Frick, “How Software Is Helping Big Companies Dominate,” Harvard Business Review, 11/19/18)