Winner takes most: assessing the impact of the digital age on firm size, market power and competition

Rising concentration and markups across multiple developed economies has brought issues of competition and market power to the fore. This thesis contributes to that debate by examining if changing production dynamics brought about by the development of digital technologies are having heterogeneous impacts on firms of different sizes, thereby changing the balance of competition between larger and smaller firms.

The thesis assesses changing competitive dynamics by examining the evolution of markups and multifactor productivity (MFP) across firms of different sizes. It finds that size is positively related to markups, and that this relationship has strengthened over time. It also identifies an increase in the relative productivity advantage of larger firms. Both changes are more pronounced in digital intensive industries, suggesting that digitalisation may be a driver.

It then examines the means by which digitalisation may be impacting competition by assessing changing production dynamics and their impact on the benefits of scale. Specifically, it examines the links between digitalisation and the growth of intangible investment more broadly, and how this is related to changing production dynamics.

The thesis finds that firm-level intangible investments have grown significantly, and have become a larger element of production functions (especially in digital intensive industries). The marginal impact of intangible assets on profitability is significantly greater for the leading firms in an industry, consistent with greater scalability of intangible assets. More granular firm-level analysis across five different size groups indicates that the marginal impact of intangibles on profitability increases systematically with size, with the impact more pronounced in digital intensive industries. In addition, industry level analysis shows that intangible intensity is a significant factor in determining profitability gaps between industry leaders and laggards.

In addition, the thesis examines if digitalisation and intangible assets more broadly are impacting corporate tax revenues. It finds that firms in digital intensive industries have slightly lower cash effective tax rates, though the impact is relatively modest.

Finally, the thesis examines potential policy recommendations. A key finding is that there are no ‘one size fits all’ policy measures when it comes to promoting digitalisation. Policymakers must recognise the heterogeneous impacts of technological investments on firms of different sizes by adopting more tailored policy measures. For example, governments can assist smaller firms through measures such as encouraging SME training and upskilling, promoting alternative sources of finance, assisting with digital security issues, and encouraging cloud-based solutions.