Research Highlight Why regulators need to curb the dominance of ‘superstar’ firms

A handful of very large firms, or ‘superstar firms’ have come to exert excessive market power, like the so-called GAFAM in the tech industry. This dominance has all but crushed competition, stifling innovation, harming consumers and exacerbating income inequality. A new paper explains why and how regulators should fight back.

The rise of superstar firms

Do you post photos on Instagram from your iPhone, order books on Amazon, use Google as your go-to search engine and the Office environment at work? If so, you are not alone. Hundreds of millions of other consumers use mobile or desktop software and social media or other applications designed by the so-called GAFAM – an acronym for Google (now Alphabet), Apple, Facebook (now Meta), Amazon and Microsoft.

These five major tech companies are at the heart of our lives – and our economy. In fact, they have achieved unprecedented dominance, as ESCP Finance Professor Pramuan Bunkanwanicha and Global Executive PhD student Diego Abellán Martínez point out in a recent impact paper. Their meteoritic rise is due largely to the economic environment of the past two decades, particularly in the US - the birthplace of the GAFAM, with its trends towards deregulation and the growth of intangible assets (IT, brands).

This massive market concentration, which is almost a monopoly in each market segment, has generated extraordinary returns for the shareholders of the winners rather than enhancing the whole economy.

Today, the five ‘tech superstars’ have combined annual revenues of $1.4 trillion, a market capitalization of $9.2 trillion and more than 2 million employees. To give an idea of just how staggering these figures are, the authors quote the 2,000 listed firms on Euronext's aggregated market cap of $7.3 trillion as a comparison.

No wonder they deem that “superstar is the appropriate term” for such behemoths. Different researchers have used alternative definitions of superstar firms, either as the most productive (with above-average markups), those in the top 10% in terms of ROIC over 5 years or longer, or based on market values. Whatever the exact definition of superstar firms, they control huge chunks of the market and yield disproportionate economic power in their sector.

Risks and challenges associated with superstar firms

What are the consequences of such excessive market power? In their paper, Pramuan Bunkanwanicha and Diego Abellán Martínez document a number of adverse effects: 

  • Extreme market concentration generates welfare loss
    Superstar firms are an extreme phenomenon of market concentration, dominating their markets almost as monopolies. This winner-takes-all situation stifles innovation in laggard firms and in young start-ups, which have difficulty raising funds and entering the market. Altogether, this threatens the ideal cycle of competition and its side benefits of market prices with low markups. There is also evidence that massive market concentration generates profits through higher markups rather than through improved efficiency.
  • The labour market is penalized
    Corporate giants' bargaining power allows them to push wages down and restrict free labour movements, for example through non-compete agreements. It is also well-documented that there has been a fall in the labour share of GDP in many countries, with income redistributed to shareholders rather than employees. “The decline in labour share and the increase in pure profits increase income inequality in society, and superstar firms are exacerbating this situation,” warn the researchers. In addition, the companies that are able to extract rents do so by increasing markups, “severely affecting the poor, who overpay for the goods without benefitting from these extra profits and capital gains.”
  • Major corporations' political power allows them to affect the rules of the game
    With revenues high enough to rival the governments', superstar firms are able to “modify the rules of the game to keep performing as monopolies,” in the words of the two researchers. By lobbying, or simply by virtue of being very large employers, they are in an optimal position to receive tax breaks and other benefits, and can pressure local and national authorities to reach their own goals. 

In brief, these superstar firms “exercise their monopolistic power with customers, suppliers and employees to maintain their extraordinary profits,” summarize the authors, who caution that this comes at a high cost to society. 

How should regulators fight back?

Regulators must try to limit the dominance of such leviathans, especially to prevent inequality from increasing any further. There has been debate about creating (sometimes state-owned) ‘national champions’ like China's Huawei to compete with superstar firms and promote innovation and growth, for example by giving the national champions preference in government contract-bidding. But the authors warn that such policies may have adverse effects too; for instance, by simply reproducing a situation of lack of competition. 

The authors, for whom fair competition plays a key role in sustainability, urge governments to improve competition in the industries where star firms discourage investment in innovation and hold back growth. How so? The authors suggest “facilitating access to funding for start-ups and reducing regulatory and artificial barriers to competition.” By ‘artificial barriers’, they mean those created by firms with economic and political power, related to complex intellectual property rights or workforce mobility limitations for example. As powerful firms may also seek to maintain their dominant position through acquisitions, regulators have an antitrust role to play, always with the objective of protecting competition to benefit consumers. “Antitrust enforcement must be strict about disincentivizing powerful firms from searching for market power,” conclude Pramuan Bunkanwanicha and Diego Abellán Martínez. However, this requires antitrust bodies to have access to transparent disclosure of corporate activities in order to properly monitor market power. 


Diego Abellán Martínez Diego Abellán Martínez Global Executive PhD student at ESCP Business School, co-founding partner of Outliers Ideas
Pramuan Bunkanwanicha - ESCP Business School Pramuan Bunkanwanicha Professor of finance and Faculty Dean at ESCP Business School (Paris campus)