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Large Firms and the Effect of Trends in Market Structure on Long-run Technology Growth

Recent studies have documented several trends in the U.S. market structure since the 1980s, such as the rise of large firms' markups and their profit margins. An important but not emphasized trend is the rise of the fixed operating costs of large firms. This trend is so salient that the sales-to-fixed operating costs ratio is decreasing. This paper proposes a Schumpeterian model to study the effect of these changes in market structure on growth. Each product line contains a dominant (large) firm with a competitive fringe. We estimate the parameters and then, a time series of fixed operating costs that matches the dynamics of the market share of dominant firms. The estimated sales-to-fixed operating costs ratio has an 81.1% correlation with the data. The model associates about a 0.5 percentage point increase in productivity growth in the 1980s to the changes in market structure. Importantly, a combination of strong technology spillovers and business stealing effects -- endogenously driven by the fixed operating cost -- can capture the trends in market structure.