There are several drivers of income inequality, including globalisation and various organisational and institutional factors. Technology and its development is also such a driver.
Among the impacts of technology is the increasing disparity between the incomes of skilled and unskilled workers. In concentrated markets, digital innovations may be one of the reasons why the income share of top income groups (top executives and shareholders) is increasing.
Market dynamics in the digital age
Successful innovators have a temporary exclusivity over their innovations. Thus first-movers have all the benefits stemming from intellectual property rights protection, brand reputation and entry barriers. This allows for extra profit.
In the digital age, knowledge and intangible assets are the most important inputs. There are also increasing returns to scale, which is why concentrated market structures are successful. The result is that several small companies can expand very quickly. The best of them wins the race and gains almost all the market. However, for a variety of reasons, the barriers to entry are high, according to an article on the website of the INSEAD business school:
- Economies of scale allow incumbents to beat their competitors in terms of efficiency.
- Network effects (more users of a product means the product is more valuable for users) lead to products which are less substitutable, so that switching to a competitor is not really an option. In addition to that, large players can influence technical standards and increase entry costs.
- Due to access to data, incumbents can more easily offer their innovations. They are also able to acquire any successful start-up.
All that being said, technology-intensive firms may still be fragile and volatile since more players might potentially disrupt their market.
-jk-