Winner-Takes-All Markets

A winner-takes-all market is one in which the top performer captures most of the rewards, whether revenue, profit, market share or income, even if it is only slightly better than its rivals. The phrase was popularized by economists Robert Frank and Philip Cook in their 1995 book The Winner-Take-All Society. It builds on Sherwin Rosen's 1981 paper "The Economics of Superstars", which explained why small differences in talent can produce very large differences in earnings.

The idea applies both to firms, such as search engines, social networks and operating systems, and to people, such as leading entertainers, athletes, authors and chief executives. Common drivers are network effects, economies of scale and the near-zero marginal cost of copying digital goods. Outcomes in such markets often follow a power law rather than a bell curve, which links the concept to debates about economic inequality and antitrust policy.

Think of a singing contest where only the winner gets a recording contract. The runner-up may be almost as good, yet ends up with nothing comparable. A tiny gap in skill turns into an enormous gap in reward.

Or think of a group chat. If all your friends use one messaging app, a slightly better rival app is useless to you because nobody is there. Each new user makes the leading app more attractive, so the leader keeps pulling further ahead. Markets that work like this tend to end up with one big winner.

• Scale through replication. Rosen noted that a performer whose work can be recorded or broadcast can serve millions at once, so audiences flock to the best rather than spreading across many.
• Network effects. Products that become more valuable as more people use them, such as payment networks, marketplaces and social media, tend to tip toward one provider.
• Switching costs and lock-in. Data, habits and compatibility make it costly to move to a rival.
• Data feedback loops. More users generate more data, which can improve the product and attract still more users.
• Relative rankings. When rewards depend on being the best rather than being good, as with top university places or positional goods, competition concentrates on the top spot.

In a 2020 paper, David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen linked rising concentration in many US industries to "superstar firms" that win large market shares with high profits and relatively few workers, and argued that this helps explain the falling share of national income paid to labor. The largest technology companies now account for a large share of US stock market capitalization. Many of them are platform companies, and several markets they lead, such as search and mobile operating systems, look like a monopoly or tight oligopoly. In payments, the global card market has long been dominated by two networks, though national real-time systems are changing that in some countries.

Economists stress that such markets can be contested. Firms may compete hard to become the winner, "competition for the market" rather than within it, and leaders can be displaced by creative destruction, as happened to early leaders in search and social networking. An early lead can turn into lasting dominance when network effects are strong, which is why first-mover advantage matters more here than in ordinary markets.

The same forces shape pay. The best-known performers in music, sport and publishing earn many times more than others who are nearly as skilled, and the wages of top executives have grown much faster than average pay in many countries since the 1980s. Income at the very top often follows a Pareto distribution. Frank and Cook argued that such rewards attract too many people into long-shot contests and that much of the top pay is economic rent, a return above what would be needed to keep the person in the job. Others argue that superstar pay reflects the genuine value of reaching huge audiences or managing very large firms.

Responses to winner-takes-all markets include stronger competition enforcement under laws such as the Sherman Act, scrutiny of acquisitions of young rivals, rules on interoperability and data portability, and new regimes such as the EU Digital Markets Act. For winner-takes-all incomes, some propose a more progressive tax system. Critics of intervention, including many in the Chicago school, argue that dominant firms often win because they offer better or cheaper products, that consumers benefit from free services, and that measures of concentration can overstate market power. Clustering of talent in a few cities, discussed under business clusters, shows the same tendency at the level of places.

• NBER: Autor et al., "The Fall of the Labor Share and the Rise of Superstar Firms"