Market Concentration, Growth, and Acquisitions

Abstract

I develop an oligopolistic growth model in which a firm chooses how much to innovate, as well as the degree to which its innovation is directed toward its competitors’goods through creative destruction. I find that a firm’s size shapes the direction of its innovation: larger firms generate less growth relative to the rate at which they creatively destroy their competitors’ goods. I demonstrate positive and normative implications of this mechanism. First, an increase in large firm innovation incentives can explain a substantial portion of the recent growth slowdown in the US. Second, it is optimal to tax large firm revenues because the direction of innovation is more significant than other size-related distortions. Third, a tax on large firm acquisitions of smaller competitors’ goods can reduce welfare by encouraging large firms to innovate rather than acquire. Fourth, it is advantageous to be large.