May 15, 2017

How "superstar firms" contribute to rising inequality

Paul Sakuma / AP

The global marketplace has made it possible for superstars in music, sports, and even business administration to earn more money than ever before in what economists have labeled a "winner-take-all economy," whereby the best earn outsized rewards while the rest struggle.

New research from economists David Autor and Lawrence Katz suggests that this dynamic is also present in competition between corporations. They write that the rise of "superstar firms" is one cause of the recent decline in the share of corporate profits going to workers rather than shareholders.

Why it matters: Since the 1980s, industry concentration has risen across the developed world, and the growing power of corporations that are dominating their respective industries has enabled them to suppress wages.

Why concentration has risen: One example of a beneficiary of the winner-take-all economy is Google, which enjoys a market share of 63% in the United States and 90% in Europe. The nature of the search-engine business leaves little incentive for customers to choose the second-best option, and there is no room for runners up to differentiate themselves based on price, as search engines, like many new-economy products, are provided freely. But this is not the only explanation for rising industry concentration. The authors also find evidence for other causes, like:

  • Lax enforcement of monopoly laws;
  • The increased reliance on patents to reduce competition;
  • The "fissuring" of the workplace, whereby highly profitable firms are increasingly outsourcing tasks like janitorial or clerical work, and thus excluding them from the benefits of working for superstar corporations.

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