Declining Industrial Dynamism

James Bessen, Erich Denk, Joowon Kim, and Cesare Righi

Recent research finds that markups are rising, suggesting declining competition. But does less price competition mean less Schumpeterian “creative destruction”/industry dynamism? This paper reports the first recent estimates of trends in the displacement of industry-leading firms. Displacement hazards rose for several decades since 1970 but have declined sharply since 2000. Using a production function-based model to explore the role of investments, acquisitions, and lobbying, we find that investments by dominant firms in intangibles, especially software, are distinctly associated with greater persistence and reduced leapfrogging. Software investments by top firms soared around 2000, contributing substantially to the decline. Also, higher markups are associated with greater displacement hazards, linking rents positively with industry dynamism. While technology is often seen as disrupting industry leaders, it now appears to help suppress disruption.

SSRN working paper