Information Technology, Firm Size, and Industrial Concentration

Information technologies (IT) have the potential to reshape the organization of firms and the structure of markets. In this paper, we develop a Cournot competition model in which IT enables firms to replicate the routines of their most efficient establishment across locations. This leads to a decline in marginal cost production and the “scale without mass” outcome: because of IT adoption, firms’ revenue grows faster than employment. Drawing on US Census microdata covering a panel of about 5000 firms, we confirm that greater investment in IT is associated with increases in sales and market concentration, with smaller and more ambiguous effects on employment. Results from instrumental variables and long-difference models suggest that the association is causal. Because the effect of IT is more pronounced on sales than employment, it compresses the labor share. We also show that IT disproportionately benefits larger firms by enhancing their ability to scale and replicate their operational processes across multiple establishments, markets, and industry segments. By pinpointing how firms operationalize IT gains through replicating high-efficiency routines across establishments, our model and analysis deepen our understanding of the micro-foundation behind recent macro evidence on rising concentration and declining labor share in the digital era.