Data and Market Power
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.
We thank Renjie Bao, Huasheng Nie Xiaobo Yu and Judy Yue for excellent research assistance. We also thank Ariel Pakes and Hugo Hopenhayn for useful discussions that led to this project. Eeckhout gratefully acknowledges support from the ERC, Advanced grant 882499, and from ECO2015-67655-P. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.