The Rich Are Getting Richer
In a capitalist market the common way of thinking is that any business at the top will eventually fall behind other emerging businesses if that business ever stops innovating. This ensures that one company never stays on top for too long and all companies must continue innovating to stay competitive which gives the best overall results as innovation is constantly occurring. However, in recent years it has been observed that the top 5% of businesses continually increase their productivity and profits more than the other 95% of businesses causing the businesses at the top to stay at the top. “The great divergence” form The Economist gives several possible explanations for such a phenomenon including a winner-takes-all market, the top firms just having better methods, and the slowing of technology diffusion.
The first possible explanation, the winner-takes-all methodology, is the idea that the first company in a market will quickly establish a dominant role. This effect is especially prevalent in the information technologies sector where there is usually a low cost for users to join and the more people who use the network the greater the direct benefit to each person, so the more people will join. Thus the first company in a sector to gain a commanding lead will keep their lead as it is difficult for a competitor company to catch up as their networks will not provide the same direct benefit to their users as the network of the dominant company. A second explanation for the companies at the front being able to remain at the front is they all have a special system which works extremely well for them and which no other company can match. Whether this system allows them to have better management or cut costs more effectively, it ensures that they stay at the top for a long time. Lastly, the author suggested that a stall in the spread of new ideas through the economy has created an atmosphere where other companies cannot catch up since they do not have access to the most recent ideas and technologies. A possible solution to this final problem would be to get the top companies to spread their best practices to other companies, however, this equal to the top companies helping their competitors so it is unlikely to happen without mandatory restrictions imposed by governments.
The model proposed in this article closely matches the rich get richer model presented in class as the companies at the top continue to grow increasing profits and productivity which the lagging companies stay at about the same rates of profit and productivity. As shown in class this behavior can be well modeled as a power law where the very few companies at the top reap the majority of the benefit while the rest of the companies get only a small amount of benefit. Since the companies at the top get all the benefit in the rich get richer model it is difficult for a lagging company to ever make it to the top and thus the gap between the top companies and the lagging companies will continuously grow as the top companies continue to increase their benefit. We also discussed in class the winner-takes-all methodology which allows a company to obtain a commanding lead in a market and thus allows the rich get the richer model to begin as there will be a few dominant companies and many lagging companies.
http://www.economist.com/news/business/21709976-group-elite-firms-has-established-sustained-lead-not-good-thing-great