Market power and innovation in the intangible economy

Maarten De Ridder

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Productivity growth has stagnated over the past decade. This paper argues that the rise of intangible inputs (such as information technology) can cause a slowdown of growth through the effect it has on production and competition. I hypothesize that intangibles cause a shift from variable costs to endogenous fixed costs, and use a new measure to show that the share of fixed costs in total costs rises when firms increase ICT and software investments. I then develop a quantitative framework in which intangibles reduce marginal costs and endogenously raise fixed costs, which gives firms with low adoption costs a competitive advantage. This advantage can be used to deter other firms from entering new markets and from developing higher quality products. Paradoxically, the presence of firms with high levels of intangibles can therefore reduce the rate of creative destruction and innovation. I calibrate the model using administrative data on the universe of French firms and find that, after initially boosting productivity, the rise of intangibles causes a 0.6 percentage point decline in long-term productivity growth. The model further predicts a decline in business dynamism, a fall in the labor share and an increase in markups, though markups overstate the increase in firm profits.

Keywords: Business Dynamism; Growth; Intangibles; Productivity; Market Power (search for similar items in EconPapers)
JEL-codes: J1 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-03-29
New Economics Papers: this item is included in nep-com, nep-cse, nep-ind, nep-ino and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
http://eprints.lse.ac.uk/100946/ Open access version. (application/pdf)

Related works:
Journal Article: Market Power and Innovation in the Intangible Economy (2024)
Working Paper: Market power and innovation in the intangible economy (2024)
Working Paper: Market power and innovation in the intangible economy (2022)
Working Paper: Market Power and Innovation in the Intangible Economy (2019)
Working Paper: Market Power and Innovation in the Intangible Economy (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:100946

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().