The Vexing Question of Prussia

Peter J. Klenow, Huiyu Li, and Theodore Naff: Is Rising Concentration Hampering Productivity Growth? 'The initial rise in concentration was accompanied by a burst of productivity growth and that concentration in local markets may actually have declined.... Rising concentration was a byproduct of the information technology (IT) revolution, with effects on productivity growth that vary over time.... Large firms expanded by adding establishments in new locales. To the extent that the number of establishments is connected to the number of products or markets, this evidence suggests that large firms increased their national sales share by adding new markets rather than increasing their sales share within existing markets. This is consistent with the rise in concentration coming from lower costs for managing many establishments as a result of the IT revolution.... IT improvements may have enabled efficient firms to expand into new markets and set the stage for the burst of productivity growth in the decade leading up to 2005. The expansion of large firms also may have intensified competition and cut into profits, discouraging them from innovating within markets. This, in turn, could have contributed to the eventual slowdown of productivity growth in recent years.... Policymakers need to gain a fuller understanding of the tradeoffs to formulate appropriate policy and avoid potential unintended consequences...

#noted #2019-12-10