In two new studies, researchers find signs of a weakening competitive environment for a large number of countries using two distinct measures: firm markups and industry concentration. These studies suggest that the trends first observed in the U.S. are part of a broader phenomenon, likely caused by factors that are common to many developed economies. The jury is still out on the relative importance of M&As, intangibles, and digitization, together with other factors such as globalization and anti-competitive regulations. For firms, however, the message is clear: this is a superstars’ economy, and the scope for being average is becoming increasingly narrow.

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Imagine a dynamic economy. Businesses compete for customers under the constant threat of new competitors entering the market. If firms want to survive, they need to constantly innovate and upgrade the quality of their products while keeping their prices low. If they cannot, they may be replaced by those that can. Resources keep flowing to the firms that use them best.

We seem to be drifting away from this ideal.

Warning signs are mounting. Productivity growth has slowed; the best firms are doing well but the rest of the economy has a hard time keeping up. Fewer start-ups are being launched and fewer workers move to the more efficient firms. A growing share of sales in many industries is going to a few large companies, and firm markups (the difference between the cost of producing one unit and its selling price) are also increasing.

This matters not only for businesses, but for workers and consumers, too. Weak productivity growth means stagnating wages. As the best firms pull away from the rest, so does the pay of their workers compared to the average Joe. As a few firms become increasingly profitable, a larger slice of the pie ends up with their investors and smaller portions for their workers. Dominant firms can also mean dominant employers in labor markets and less bargaining power for workers. Last but not least, if weaker competition reduces the pressure on businesses to innovate, long-run growth suffers.

Much of the evidence we just mentioned is about the U.S. economy. In our research, we wanted to determine whether these trends are U.S.-specific and driven by U.S.-specific policies, and whether they are restricted to particular industries, such as the tech sector, or are prevalent across many parts of the economy.

In two new studies, we find signs of a weakening competitive environment for a large number of countries using two distinct measures: firm markups and industry concentration. These studies suggest that the trends first observed in the U.S. are part of a broader phenomenon, likely caused by factors that are common to many developed economies.

In one study, we examined markups for 25 mostly developed countries over the period of 2001-2014. We document an overall rise in the mark-ups of the average firm, and an even greater increase at the top end of the markup distribution. High markup firms today seem to charge higher mark-ups than firms in the past. Importantly, the results hold also when we exclude U.S. firms from the sample.

In another study, we compare the evolution of industry concentration in Europe and in North America between 2000 and 2014. We find increasing industry concentration for Europe, although less pronounced than in the case of North America. The share of the eight largest companies in each industry increased, on average, by 4 percentage points in Europe and 8 percentage points in North America. In each region, three quarters of industries saw rising industry concentration.

Taken together with earlier evidence documenting declining startup rates and slowing job churning across the OECD, these studies suggest that many of the trends first observed in the United States hold more broadly and so cannot be purely due to U.S.-specific policies. So, what is causing them?

One candidate is merger and acquisition (M&A) activity, which has reached record highs in recent years. Ongoing research at the OECD is looking into whether the surge in M&A activity can explain increasing concentration. Our preliminary results indicate that some M&As, especially large ones, are indeed correlated with increases in industry concentration measures.

Another candidate is the rise of “superstar” firms – a minority of firms that are more innovative, productive, and profitable than everyone else. While increasing firm markups can be interpreted as companies charging too high a price and reducing incentives to innovate, the “superstar hypothesis” suggests that some firms benefit from high market shares and margins exactly because they offer cheaper or better products and services than their competitors. This view is supported by the data: in line with other papers, we find that large firms in the concentrating industries display a faster, not slower, productivity growth compared to large firms in industries where concentration is stable or decreasing.

“Superstar” firms are often big investors in intangible assets – such as advertising, training, management, R&D, and data. Such investment often represents a large sunk cost that is only affordable to larger firms. It may also be that only the better-managed firms fully realize the returns to intangible investment. As a result, the increasing importance of intangibles in determining winners and losers is broadening the advantage of large and highly productive firms. Indeed, in our mark-up paper, we find that firms operating in industries with more intangible assets tend to have higher markups, once the role of other firm and industry features in shaping markups is taken into account.

Finally, digital technologies may be the elephant in room, though their influence remains hard to pin down. They determine the winners and losers and allow star firms to scale up and become the superstars. But they also present challenges to researchers trying to measure them. Traditional industry definitions are often inadequate when measuring digital firms. Is Uber a tech company or a transportation company? It can make more sense to talk of digital firms rather than digital industries, but measuring complex, pervasive and rapidly evolving technology over multiple countries and industries is hard. How do we appropriately capture network effects, data flows, or market shares of companies with zero sales? Perhaps it’s not surprising, then, that we do not find an entirely consistent role of digital technologies in the trends we document. On the one hand, firms operating in digital-intensive sectors tend to have higher markups, and this difference has increased over time. On the other hand, we do not find stronger increases in concentration in digital-intensive sectors. Further research is needed.

The jury is still out on the relative importance of M&As, intangibles, and digitization, together with other factors such as globalization and anti-competitive regulations. For firms, however, the message is clear: this is a superstars’ economy, and the scope for being average is becoming increasingly narrow.