The Impact of Digitalization on Market Competition Structures

Abstract

This study examines the impact of digitalization on market structure, with a particular focus on market concentration and market power across industries. Using panel data over a ten-year period, the research employs Fixed Effects and Instrumental Variable (2SLS) estimations to identify the causal relationship between digital intensity measured by internet penetration, digital transaction value, and platform adoption and market concentration indicators such as the Herfindahl–Hirschman Index (HHI) and the Concentration Ratio (CR4). The results show that digitalization has a positive and statistically significant effect on market concentration, particularly in platform-based sectors characterized by strong network effects and economies of scale. Additional evidence indicates rising markups in highly digitalized industries, suggesting increased market power among dominant firms. While digital transformation enhances efficiency and innovation, it may also accelerate oligopolistic tendencies and create new entry barriers through data control and ecosystem integration. The findings highlight the dual impact of digitalization on competition and consumer welfare, emphasizing the need for adaptive competition policy in the digital economy.