High-Technology Industries and Market Structure

The term ``New Economy'' refers to a golden, or at least gilded, age in the late 1990s that was driven by optimism about the financial prospects for information technology (IT). There were three back-to-back investment shocks during this period: telecommunications deregulation in 1996, the ``year 2K'' problem in 1998-99, and the ``dot com'' boom in 1999-2000. These events stimulated significant investment in information technology in a number of industries, leading to a very rapid expansion of IT-producing industries.

Figure 1 depicts the cumulative rate of return on the NASDAQ and the S&P500 during most of the 1990s. Note how closely the two indices track each other up until January of 1999, at which point NASDAQ takes off on its roller coaster ride. Eventually it came crashing back, but note that the total return over the eight years depicted in the two indices is about the same.

Figure 1 actually understates the magnitude of technology firms on stock market performance, since a significant part of the S&P return was also driven by technology stocks. In December 1990, the technology component of the S&P was only 6.5 percent; by March, 2000, it was over 34 percent. As of July 2001, it is about 17 percent.

Despite the dramatic run-up and run-down in technology stocks, it is clear that technology has played, and will continue to play, a significant role in the economy. The increase in productivity growth in the late 1990s is often attributed to the investment in IT during the first half of that decade. If this is true, then it is very good news, since it means we have yet to reap the benefits of the IT investment of the late 1990s. (See Brynjolfsson and Hitt (2000), Steindel and Stiroh (2001), and Stiroh (2001), among the many papers on IT and productivity growth.)

Outline

This paper is concerned with the relationship between technology and market structure. High-technology industries are subject to the same market forces as every other industry. However, there are some forces that are particularly strong in high-tech, and these will be the primary concern of this survey. These forces are not ``new.'' Indeed, the forces at work in network industries in 1990s are very similar to those that confronted the telephone and wireless industries in the 1890s.

But forces that were relatively minor in the industrial economy turn out to be critical in the information economy. Second-order effects for industrial goods are often first-order effects for information goods.