Market Power and Innovation in the Intangible Economy

Abstract

This paper offers a unified explanation for the slowdown of productivity growth, the decline in business dynamism and the rise of market power. Using a quantitative framework, I show that the rise of intangible inputs – such as software – can explain these trends. Intangibles reduce marginal costs and raise fixed costs, which gives firms with high-intangible adoption a competitive advantage, in turn deterring other firms from entering. I structurally estimate the model on French and U.S. micro data. After initially boosting productivity, the rise of intangibles causes a significant decline in productivity growth, consistent with the empirical trends observed since the mid-1990s.