The standard metric of monopoly power is the concentration ratio, or the share of the market accruing to the top four (or 20) firms. In a 2017 paper, MIT’s David Autor, Christina Patterson, and John Van Reenen, along with University of Zurich’s David Dorn and Harvard’s Lawrence F. Katz, compute the four- and 20-firm concentration ratios for six sectors of the US economy: manufacturing, wholesale trade, retail trade, services, finance, and utilities and transportation, for 1982–2012. Together, the six sectors account for 676 industries, nearly 4 million companies, and 80 percent of total private-sector employment.
Autor and his coauthors find that the four- and 20-firm concentration ratios have been trending upward in all sectors—and in some of them, quite sharply upward. The four-firm concentration ratio increased by approximately 15 percentage points (in other words, it doubled) in retail trade and by more than 10 percentage points in finance.
Crucially, the upward trend in concentration ratios is more evident for sales revenue than for employment. Superstar firms are generating more sales revenue without increasing their employee base by much.
Superstar firms derive substantial advantages from their management and organizational practices.
Superstar firms have proven to be especially adept at exploiting the killer combination of demand-side network externalities—those forces that make a product or service’s consumer appeal increase as its user base grows—and supply-side economies of scale. Apple has a 20 percent share of the smartphone market but captures as much as 92 percent of the industry’s operating profit. Google processes 3.5 billion searches each day and Facebook has 1.32 billion active users each day; together they take in, according to some estimates, as much as 60 percent of all digital advertising revenue.
Importantly, superstar companies excel in their use of the structured and creative management/organizational practices that large and complex projects require.
In 2010, the US Census Bureau conducted its first Management and Organizational Practices Survey. Nearly 40,000 manufacturing establishments participated in MOPS, which used 36 multiple-choice questions to poll businesses on their management practices (processes for setting targets, monitoring performance, and providing incentives), organizational practices (structure, span of control, and the use of information), and basic characteristics (the number of managers and nonmanagers, educational attainment of managers, and union participation).
Stanford’s Nicholas Bloom, MIT’s Erik Brynjolfsson and John Van Reenen, Lucia Foster and Ron Jarmin of the US Census Bureau, and Tel Aviv University’s Itay Saporta-Eksten analyzed this data set by constructing an aggregate score for each manufacturer’s answer to the 36 questions (normalized to a 0–1 scale). As their results demonstrate, there is enormous dispersion in the quality of management and organizational practices across US firms.
Only 18 percent of establishments employed at least 75 percent of the structured management practices included in the survey, while 27 percent of establishments adopted less than 50 percent. The superstar firms that received the highest scores on the adoption of structured management practices significantly outperformed those with lower scores. Even small improvements in management led to significant increases in profits and firm valuation.
Superstar firms are frugal in their use of labor.
In 1990, GM, Ford, and Chrysler had combined annual revenues of $250 billion, a combined market capitalization of $36 billion, and an employee base of 1.2 million. In 2016, the five tech superstars—Google, Apple, Amazon, Facebook, and Microsoft—cumulatively had annual revenues of $559 billion, a market capitalization of more than $2 trillion, and an employee base of 660,500.
Jae Song of the Social Security Administration, Stanford’s Bloom and David J. Price, Fatih Guvenen of the University of Minnesota, and Till von Wachter of University of California at Los Angeles estimate that about one-third of the growth in income inequality across US households since 1980 can be explained by the gap between compensation for employees at the superstar firms relative to their counterparts working elsewhere.
This kind of sway over aggregate income trends brings us back to the enormous economic and financial power that superstar companies wield today. That power can be, and often is, put to excellent use: these companies have the gumption to make the moon-shot investments that even modern-day governments are loath to make. They have the organizational ability to mobilize resources from across the world at warp speed and the management skills to coordinate complex projects. But they also have the incentive and the power to thwart competition and influence the rules of the game.