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Aggregate Market Power

How can we reconcile these findings with the general sense that superstar firms are creating supernormal value for their investors over time, and in the process, disrupting industries? 

The debate on superstar firms often focuses on a very small number of firms, such as Facebook, Amazon, Netflix, and Alphabet (the parent company of Google) – jointly called the FANG stocks – and a few others. The statistical analysis used here is not optimised for such small sub-samples. However, there may be a deeper reason. 

Many of the superstar firms are likely playing a longer game. For instance, in a letter to Amazon shareholders in 1997 Jeff Bezos, the CEO, stated that the firm makes decisions and weighs trade-offs differently:

We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position… and correspondingly stronger returns on invested capital.… We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.2

Amazon’s business model prioritised growth over profits to achieve scale. Thus, superstar firms may not be exercising market power in ways that harm consumers in the short run, or that would be picked up by current ways to measure market power. If this is the case, the critical concern for policy is to ensure that markets remain contestable and that entrants with new technologies can challenge current market leaders.