Economics/Q/Are most internet businesses winner-take-most businesses with four or five major competitors?
Are most internet businesses winner-take-most businesses with four or five major competitors?
- Short answer: Research supports a narrower claim: digital platforms and digitally intensive industries are unusually prone to concentration. The evidence does not establish that most internet businesses are winner-take-most or that they usually settle at four or five major firms.
- Business-school economists have studied the question directly, including Richard Schmalensee at MIT Sloan and platform-market researchers affiliated with Harvard Business School. Their work focuses on measurable mechanisms—network effects, switching costs, multi-homing, scale, differentiation, and market shares—rather than treating internet distribution as one market structure.
- Person/Casey Newton made the broader claim at 00:24:25 in Hard Fork/Pod/26/09/A.I. Safety Goes Mainstream + a ‘Hard Fork’ Exit AMA: Readwise/Snipd clip.
- The strongest direct support concerns platforms. An OECD review reports that the median leading-platform share across the online platform markets it studied was 64%, and that the leader remained the leader over the preceding two years in a large majority of cases. The same review attributes concentration to low marginal costs, network effects, data, and algorithms: Digitalisation and productivity.
- Broader industry comparisons show a real but moderate digital effect. A study of the EU4 and United Kingdom found that digitally intensive industries began more concentrated and concentrated faster from 1998 to 2019. Their average four-firm share reached 33% in 2019, six percentage points above 1998. That is evidence of greater concentration, but it does not describe a market captured by four firms: Concentration and Competition: Evidence From Europe and Implications for Policy.
- Cross-country evidence points in the same direction. OECD researchers found rising concentration across many countries and sectors from 2002 to 2014, with a stronger relationship in globalized and digital-intensive industries. Investment in software, data, and other intangible assets appears to help large firms scale: Intangibles and industry concentration.
- Internet distribution can concentrate demand without creating a tiny oligopoly. Research on travel agencies, bookstores, and auto dealers found that e-commerce lowered search costs and shifted market share from lower-quality to higher-quality producers, while increasing small-outlet exit in some local markets: E-commerce and the Market Structure of Retail Industries.
- Network effects do not make concentration inevitable. MIT Sloan economist Richard Schmalensee and David Evans argue that the simple “network effects imply an unbeatable winner” story has many counterexamples: Network Effects: March to the Evidence, Not to the Slogans. A study of a pet-sitting platform merger likewise found that differentiation still mattered and consumers were not substantially better off with one combined platform: Dog Eat Dog: Measuring Network Effects Using a Digital Platform Merger.
- Assessment: Casey’s intuition fits markets with strong network effects, low marginal costs, high switching costs, limited multi-homing, and large data or scale advantages. “Internet business” also includes ordinary retailers, publishers, professional services, and software companies for which those conditions may be weak. The defensible claim is that digital platforms and high-digital-intensity industries have a higher tendency toward concentration than less digital industries. A fixed ceiling of four or five firms is not supported by the studies above.