Winner takes all market is an unfolding reality. Apple, ASML, TSMC, Toshiba, Nichia, Amazon, Sony, Ikea, and many others have disproportionate shares in their preferred markets. For example, TSMC has a 53 percent global market share of the foundry market, which has been growing at a rate of 19 percent. On the other hand, the number of hard disk makers fell from 85 in the 1980s to just 3 in 2010. Similarly, 3D NAND flash memory makers have fallen from 20 in the 1990s to 6 in 2021. Besides, ASML has emerged as the sole supplier of EUV lithography machines. It happens to be that such a reality has been unfolding due to competition in increasingly making products better performing.
From semiconductors, hard disks to furniture, we have been witnessing growing examples of winner takes all market. The market tends to favor decreasing number of players at the cost of many others. As a result, despite the growth of the market size, the number of firms gaining market shares and profit has been shrinking.
Instead of regulation and collusion, leveraging the technology innovation race appears to be at the core of gaining market power. Ideas in making offerings better and also cheaper simultaneously are the underlying force of creating a winner takes all market. Ideas out of deep science, software, and connectivity are creating the opportunity of reducing the material need and increasing the perceived value. Hence, to harness it, there has been an innovation race, ending up in winner takes all market reality.
Defining the winner takes all market
The winner takes all market to refer to the outcome of the competition favoring a decreasing number of firms. A long race of making products better and cheaper out of a flow of ideas leads to allowing the best performers to rise to the top at the expense of the losers. As opposed to choices made by the government and collusion, the economic system fostering competition and a rich innovation ecosystem tends to create such an effect—winner takes all market.
Certain innovations start creating a new market. For example, IBM’s introduction of the hard disk in 1957 started forming a new market for data storage. To profit from the creation of the new market, entrepreneurs rush to create products. In addition to replication and imitation, followers also engage in improving innovation through additional ideas. Often such ideas let innovators improve innovations and reduce their costs. For example, due to continued innovations performance of hard disks, NAND flash memory and electronic image sensors have been improving. Interestingly, the cost has been falling too. Hence, the race of advancing innovation unfolds for outperforming the competition and expanding the market out of a flow of ideas.
The ultimate result of the race of outperforming the competition with innovation creates an oligopoly. A small handful of large, powerful companies control a majority of the market share. In an extreme case, only one company may succeed to take over the market, making it a pure monopoly. For example, Microsoft, Google, ASML, and Facebook are examples of monopolies. On the other hand, a long race has turned the market of hard disks, semiconductors and many others into an oligopoly.
Underlying factors of creating winner takes all market
Winner takes all market does not happen all of a sudden. Innovators’ relentless journey in outperforming competition through a flow of ideas in making products increasingly better and also cheaper starts forming layer after layer. Often it takes decades to have a visible impact. From the economics of innovation perspective, winners take all market starts forming due to economies of scale, scope, and network externality effects.
The economies of scale effect take place due to the high cost of R&D in generating ideas and the negligible marginal cost of integrating them into each unit of innovation. More importantly, if ideas are implemented in software the cost of copying software in each unit of innovations is zero. Furthermore, innovators succeed to generate ideas for increasing the quality and reducing the cost simultaneously. For example, a continuous flow of ideas has been the underpinning in improving the electric vehicle battery performance and reduction of cost. Due to growing capital expenditure in R&D and increasing perceived value, innovators succeed to derive growing economies of scale advantage. Hence, there has been a race for increasing the economies of scale advantage out of R&D. As a result, better performing firms keep gaining higher market shares than their weaker counterparts.
Economies of scope advantage is another factor for gaining market power. For example, Amazon had to build a huge cloud platform to support the peak hour demand of e-commerce. But during the off-pick hour, substantial capacity used to remain idle. Hence, Amazon developed cloud service as a new business by leveraging global and temporal variations of demand of its installed cloud facilities. As a result, Amazon derived economies of scope advantage. The externality effect created out of technology progression is another source of outperforming the competition.
Either win or get lost is the reality
Due to the growing window of creating economies of scale, scope, and externality effects out of ideas, gaining market power has become a winning strategy. Through this strategy, winning firms have been making age-old cost-quality trade-offs irrelevant. As a result, weaker firms keep falling behind with their costlier poorer performing products. Therefore, it has become paramount for firms to chalk out winning strategies through market power accumulation out of R&D.
Although the telecom industry has a natural tendency of monopoly, by leveraging high R&D costs and the negligible marginal cost of idea implementation, similar effects are being created in all other technology industries. Hence, all technology industries are subject to experience winner takes all market reality. Furthermore, as visible non-technology products like potato chips or processed food are subject to benefit from sophisticated process innovation, a growing number of industries are facing the same reality.
Merits and demerits of the race of winner takes all market
Unlike in the past, the winner takes all market show up due to intense competition of making products better and also cheaper. Hence, due to this race, customers keep getting the benefit. Consequentially, the market keeps rapidly expanding. Therefore, the race of winner takes all market is a blessing for the customers.
But once the winner succeeds to take all, the innovation race slows down. As opposed to intensifying R&D, the winner starts pursuing profit-maximizing pricing. As a result, society suffers from a loss of social welfare (deadweight loss). Particularly, the winner shows reluctance to reinvent through self-destruction to form a new path of growth. Moreover, due to information asymmetry, regulations fail to overcome the limitations of winner takes all market. Therefore, the reality of unfolding winners takes all markets in a growing number of industries and runs the risk of slowing down the economy.
As explained winner takes all market is no longer limited to telecom and other infrastructure service markets. Due to the high cost of R&D in generating ideas and the marginal cost of implementing them, innovators are after a race in gaining market power and expanding the market out of a flow of ideas. Such a race has been creating economies of scale, scope, and externality effects, resulting in winner-takes all.
Despite the immense benefit, the winner takes all market effect has a serious limitation, as explained. To overcome it, conventional antitrust regulatory measures are counterproductive. The alternative is to fuel the growth of the next wave as a creative wave of destruction. To do so, Government should sponsor basic research. Furthermore, it demands fostering startups in leveraging R&D outputs to reinvent. More importantly, regulators should prevent incumbent winners from buying those startups pursuing next reinvention waves.