Our analysis suggests that an industry’s degree of openness and competitive intensity is an important determinant of its power curve dynamics. You would expect a bigger number of competitors and consumer choices to flatten the curve, but in fact the larger the system, the larger the gap between the number-one and the median spot. As Exhibit 1 shows, after the liberalization of US interstate banking, in 1994, deposits grew significantly faster in the top-ranking banks than in the lower-ranking ones, creating a steeper power curve. Greater openness may create a more level playing field at first, but progressively greater differentiation and consolidation tend to occur over time, as they did when the United States liberalized its telecom market.
Power curves are also promoted by intangible assets—talent, networks, brands, and intellectual property—because they can drive increasing returns to scale, generate economies of scope, and help differentiate value propositions. Exhibit 2 shows a significant degree of inequality, across the board, in the size and performance of companies in a number of sectors we researched. But the more labor- or capital-intensive sectors, such as chemicals and machinery, have flatter curves than intangible-rich ones, such as software and biotech.
