To me, the three main drivers seem to be the rise of software, the internet and globalization. These create larger markets that can be reached more quickly, so a small initial advantage ends up resulting in a greater profit than in the past.
Consider the invention of a new type of software product. Everyone who makes a version of the product can sell it cheaply and immediately across the world, using the internet to distribute. This means that whoever makes the best version of the product can quickly capture most of the market. Once they’ve established a dominant position, they’ll be hard to dislodge. Technology allows the development of strong barriers to entry, often through proprietary technology and network effects. Globally recognised brands provide further barriers.
For instance, after Google created the best search service, they very quickly gained a large market share: today they have over 60% of market share in the English-speaking world. That has allowed them to gather the most data, which means their search algorithm improves the fastest. As a result, the gap between Google and their competitors actually increases over time.
There are similar dynamics at play with Apple, Twitter, Microsoft, Airbnb, Facebook and many other new large companies of the last two decades.
What does it mean for your career?
It suggests that if you want to work in the corporate sector, it’s important to work with companies that are best in class, especially if you work in “new economy” industries. If the trend continues (and it doesn’t seem like the drivers of the trend are about the stop) then the importance of working with the best firms is only going to increase.
Moreover, the dynamics that apply to companies could apply to individuals as well. The best software engineers in the world get to work at the best companies and make the products that capture the market – so their rewards (both financial and otherwise) are much greater than median software engineers. This could one reason for the increase in income inequality seen over the last couple of decades. If this is true, then personal fit – i.e. finding a job you have the chance to excel at – will become increasingly important.
Finally, the underlying trends could turn out to apply elsewhere in the economy, although we can’t easily measure their impact as we can with corporate profit margins. For instance, celebrities are increasingly global brands, so the most famous people are famous in a larger ‘market’, so they receive more money and recognition than the most famous people in the past. This could apply to the famous across many fields, such as art, entertainment, media and science. See more discussion by Economist Robert Frank here.