A recent paper by PhD Candidate Maarten De Ridder of the Faculty of Economics was discussed in yesterday’s speech by ECB Vice-President Luis de Guindos. De Guindos summarized Market Power and Innovation in the Intangible Economy, which is Maarten’s Job Market Paper for the year 2019-2020.
Maarten’s research explains three trends that have recently gained much attention from macroeconomists: the slowdown of productivity growth since 2005 (after extraordinarily high growth in the 1990s), the fall of business dynamism, and the rise of corporate market power and profit margins. Maarten combines an analysis of large confidential datasets with a rich model of firm-innovation and aggregate productivity growth to show that the rise of intangible inputs (such as software, databases, and other information technologies), can explain these trends jointly.
`The key feature of intangible technologies is that they can be deployed on a larger scale at almost zero additional cost’, De Guindos states. This implies that when the role of intangible technologies in production increases, firms face a decline in their marginal costs and an increase in their fixed costs. In line with this, Maarten finds that the share of fixed costs in total costs has increased steadily, and is especially high in intangible-intensive industries. Because some firms have lower adoption costs of intangible technologies, this enables a subset of firms in the economy to produce more efficiently and to out-price their competitors. This deters start-ups and low-intangible firms from entering new markets. Maarten shows that through this mechanism, intangibles have a positive effect on growth in the short run, but a negative effect on growth and the entry of new firms in the long run.
Vice-President De Guindos further remarks that the shift from marginal to fixed costs that Maarten describes may have reduced the importance of changes in wages in price-setting decisions, therefore explaining why inflation in the Eurozone has remained low despite recent increases in wage costs. De Guindos highlights that although the rise of intangibles offers challenges, appropriate regulation can assure that the revolution in information technologies benefits European growth and prosperity.
Speech by Luis de Guindos, Vice-President of the ECB, at the ECB conference “Inflation in a changing economic environment”
Maarten’s paper and CV can be found on his webpage:
The Cambridge-INET working paper of his paper is found here:
while a VoxEU column that summarizes his results is found here: