Automation Capital Investment and Market Dominance

A central question for scholars studying competition is the role of process improving technology like automation. While some scholars have suggested that the opportunity to improve processes helps lagging firms catch up. Other recent research suggests that large firms are becoming increasingly dominant and suggests that one reason is the increasing availability of automation technology. Theoretically, which of the two obtains depends on which firms adopt the new technology. This paper studies the question of which firms invest more in automation and whether those equilibrium investments lead to market concentration. My empirical results support a model in which the equilibrium effect of investment in automation capital on market concentration depends on whether automation investments in the market are demand-creating or demand-stealing. In markets in which investment is demand-stealing, equilibrium automation investment leads to market concentration. In markets in which investment is demand creating, I cannot reject that automation investment reduces market concentration. These analyses are enabled by construction of novel establishment-level data on automation expenditure and a novel technique for determining establishments’ catchment areas.