On November 1, 2021, Professor Laura Veldkamp of Columbia Business School joined S-DEL Director Erik Brynjolfsson to explore this question: Does firms’ use of data create market power?
Data and Market Power
Might firms’ use of data create market power? To explore this hypothesis, we craft a model in which economies of scale in data induce a data-rich firm to invest in producing at a lower marginal cost and larger scale. However, the model uncovers much richer interactions between data, welfare and market power. Data affects risk, firm size and the composition of the goods firms produce, all of which affect markups. The tradeoff between these forces depends on the level of aggregation at which markupsare measured. Empirical researchers who measure markups at the product level, firm level or industry level come to different conclusions about trends and cyclical fluctuations in markups. Our results reconcile and re-interpret these facts. The divergence between product, firm and industry markups can be a sign that firms are using data efficiently to produce the goods consumers want most.
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Laura Veldkamp is a Professor of Finance at Columbia University’s Graduate School of Business and a former co-editor of the Journal of Economic Theory. Professor Veldkamp earned a Ph.D. in economic analysis and policy from Stanford Graduate School of Business. Prior to joining Columbia, she taught at NYU for 15 years. She is a faculty research fellow for the National Bureau of Economic Research and the Centre for Economic and Policy Research, and a frequent consultant for the New York and Minneapolis Federal Reserve Banks. She is also the author of the textbook, Information Choice in Macroeconomics and Finance (Princeton University Press).
Professor Veldkamp’s research focuses on how individuals, investors, and firms get their information, how that information affects the decisions they make, and how those decisions affect the macroeconomy and asset prices. Her recent work examines the data macroeconomy.