Working Paper: CEPR ID: DP17272
Authors: Jan Eeckhout; Laura Veldkamp
Abstract: Might firms’ use of data create market power? To explore this hypothesis, we craft a model in which economies of scale in data induce a data-rich firm to invest in producing at a lower marginal cost and larger scale. However, the model uncovers much richer interactions between data, welfare and market power. Data affects risk, firm size and the composition of the goods firms produce, all of which affect markups. The tradeoff between these forces depends on the level of aggregation at which markups are measured. Empirical researchers who measure markups at the product level, firm level or industry level come to different conclusions about trends and cyclical fluctuations in markups. Our results reconcile and re-interpret these facts. The divergence between product, firm and industry markups can be a sign that firms are using data to reallocate production to the goods consumers want most.
Keywords: Market Power; Data; Risk; Technological Change; Market Structure; Endogenous Markups
JEL Codes: C6; D4; D5; L1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| data (Y10) | marginal costs (D40) |
| data (Y10) | production (L23) |
| marginal costs (D40) | markups (D43) |
| data (Y10) | markups (D43) |
| data reduces uncertainty (D80) | production (L23) |
| data facilitates informed investment (G11) | marginal costs (D40) |
| data (Y10) | market power (L11) |
| data asymmetry (D82) | welfare implications (I30) |