Rising Further? Superstar Firms and Their Implications in the Time of Covid-19

Abstract

A small number of big firms are getting stronger and expanding their businesses a lot further in the time of COVID-19. The top ten firms’ market value exceeded 25% of total stock market capitalization in the United States as of August 2020, compared to less than 20% a year ago. Even though economists are researching the rise of so-called superstar firms mainly for the U.S. economy, it also seems to be a global phenomenon. We are now living in a world where competitions are less fierce in most countries and industries; thus, the economy’s dynamism is declining over time. Several macroeconomic implications are worth mentioning regarding the recent emergence of “new” superstar firms. First of all, the economy’s overall productivity slowdown may be related to superstar firm effects. The second implication is about the increasing market power of superstar firms, measured by markups. Big firms with a considerable amount of market power tend to innovate less. Last but not least, it is essential to note that firm inequality and income inequality are inter-related. Besides, since superstar firms have monopsony power, the overall economy’s labor income share will be affected negatively. Although many economists are exploring the phenomenon of superstar firms, we still do not fully understand the mechanism of how these frontier firms interact with the rest of the economy. Therefore, policy recommendations should be given carefully. But the bottom line is that any policies must be geared to enhance the productivity, encourage the resource reallocation, lessen the income inequality, stimulate the entry of new firms, and promote competition and innovation of the overall economy, not for the small number of high-performing firms.