Market Power Increase and Sectoral Heterogeneity: the Role of e-Commerce Platforms

Abstract
This paper studies the impact of e-commerce platforms on firms’ market power. I present a model with firm heterogeneity, oligopolistic competition, and Input-Output linkages, in which firms use the platforms to lower their variable costs. The cost reduction can occur either (i) as a result of efficiency gains or (ii) via direct discounts on input prices. The increasing use of platforms contributes to the rise of market power because it transforms the cost structure of the firms. Platform users show lower marginal costs but higher overhead costs: since the benefits of the marginal costs reduction outweigh the increase in overhead costs, this gives them a competitive advantage, explaining the increase in market power. Once calibrated to US data, the model attributes one third of the increase in markups to the introduction of e commerce platforms. At the sectoral level, the heterogeneity in platforms use explains up to 40% of the differences in market power trends across sectors.