Market Dominance in the Digital Age: Online Feedback Loops and Rising Industry Concentration

I document that online feedback loops, such as search engines, drive customers and revenue

to prominent firms, contributing to rising industry concentration. To identify prominent firms

online, I measure centrality in a network of firm websites covering more than 100,000 public and

private firms. Industries with firms that are more central become more concentrated and central

firms increase their market share during the sample period. This appears to be due to firms’

ability to meet earnings expectations. Central firms become more profitable and peripheral firms

earn negative risk-adjusted returns and underperform earnings forecasts. Evidence from the

COVID-19 shutdown, which drove economic activity to the Internet, supports these conclusions.

Central firms received the vast majority of the influx of web traffic and had significantly higher

returns during the shutdown.

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