LGN Seminar‎ > ‎

Firm Capabilities and Industry Structure in the Information Age (Jun Chen, Matt Elliott)

The past twenty years have witnessed the emergence of internet conglomerates fuelled by unprecedented levels of acquisitions. We provide a simple theoretical model of firm and market structure to shed light on this phenomenon. Each firm has a set of scarce capabilities and different markets value different capabilities. As a firm gains more capabilities valued by a given market, it becomes a stronger competitor in that market. We represent this information in firm and market hypergraphs and study the stable industry structures, where there no longer exists a profitable merger or demerger. We find that if markets begin to value additional capabilities, such as data about their customers or the ability to sell online, the resulting more-connected market structure can support larger firms in equilibrium. Moreover, the change is not smooth. There is a sharp phase transition in the potential size of the largest firms. We apply our framework to analyze consumer welfare and policy.