The market structure of the U.S. economy has radically changed, over the last four decades. Many sectors now exhibit increased concentration of market shares, higher average markups and higher profits.
These developments could be attributed to the rise of superstar firms whose advantage in productivity allows them to capture higher market shares, without necessarily compromising consumers' welfare and firms' investment. Alternatively, the observed increase in the market concentration could reflect higher market power of large firms and reduced competition within U.S. industries.
We show that the observed trends can only arise in an economic environment with both, higher barriers to entry and increased exposure to the new technology (ICT). Higher barriers to entry ensure that only large firms can enter the market. The arrival of the ICT accelerates the rate of obsolescence of new technologies shortening the lifecycle of innovations. As a result, the firms’ turnover increases. Firms that do implement technological advances become relatively more productive. In contrast, an incumbent that fails to implement technological advances loses in terms of relative productivity and its market shares are reallocated towards more productive firms, giving rise to superstar firms.
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