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Market Concentration and the Productivity Slowdown

Olmstead-Rumsey, Jane (2019): Market Concentration and the Productivity Slowdown.

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Abstract

Since around 2000, U.S. aggregate productivity growth has slowed and product market (sales) concentration has risen. At the same time, productivity differences among firms in the same sector appear to have risen dramatically. Sector-level data shows correlations between rising productivity gaps, concentration, and slowing productivity growth. I propose a rich model of competition and innovation to explain these findings. A key parameter governing all three phenomena is the probability that innovating firms make larger, more “radical” innovations. Thus one explanation for the coincidence of these three observations is that the incidence of radical innovations has slowed relative to the 1990s, when the internet and other information technology radically transformed production and sales technology in many sectors. The model also provides an explanation for what might be called the “superstar productivity puzzle”: sales growth of the most productive firms has coincided with slower aggregate productivity growth.

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