What Is a Winner-Takes-All Market?

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Triston Martin

Jun 25, 2022

A market where winners take all is an economic system in which the top performers can take home most of the rewards available, and the rest of the participants are left with less. The widespread presence of a market based on winner-take-all increases the gap in wealth due to a small number of people capable of capturing more income, which would otherwise be dispersed across the entire populace.


Many experts believe that the popularity of winner-take-all markets is growing because technology reduces the barriers to competition across various areas of commerce. One good illustration of a winner-takes-all market is the rise of big multinational corporations like Walmart. The past was when a large assortment of local stores was available across different geographical regions. However, improved transport, telecommunications, and information technology have eased the barriers to the competition. Big companies like Walmart can effectively manage vast resources to outdo local rivals and gain an enormous market share in nearly every industry they venture into.


The most obvious outcome of an all-winners market is one of the oligopoly. An oligopoly is a market with only a few powerful, large firms. The most extreme scenario is a monopoly where only one firm controls the entire market. The large corporations take over smaller businesses or force their businesses out by beating them out in the market.


Winner-Takes-All in the Stock Market


The rapid growth of U.S. equity markets between 2009 and 2019 has created what some consider an open market where everyone wins. People who are wealthy and can have a significant portion of their total assets invested in U.S. equity markets have profited from huge market gains over this period which have led to massive growth in wealth and income compared to the gains seen by the rest of the U.S. population. The gap in income and wealth has grown significantly during this time, with most of the gains being attributed to those who already reside in the highest 1% of earners.


This is an illustration that illustrates the "Matthew effect" that sociologists first formulated during the 60s. The result is that the wealthy get better off in a winner-takes-all scenario, and the rest are left to fend for themselves. This is because the stock market and other win-win-all strategies can be instances of zero-sum games that require winners to be ahead at the expense of losers. There are other systems in which the income growth "raises every ship" in which benefits are exchanged between gains and gains instead of zero-sum. Some examples include countries that have robust social welfare systems like those in the Scandinavian countries. There is a risk that these systems offer fewer overall benefits to the winners as wealth is distributed more equally among everyone.



Unequal Distribution


As a rule, resources are not divided equally among people. In virtually every circumstance, only a few individuals or groups win. Just a few authors wrote the majority of books sold every year. The majority of internet traffic goes limited to a handful of websites. These top websites receive more traffic than rankings 100-999 (welcome to the power-law). Most citations within any field are based on the same handful of research papers and researchers. Most clicks on Google search results focus on the first results. Each of these is an example of a market that is a winner-take-all.


Wealth is a perfect illustration of this type of market. It is based on the Pareto Principle that in the country, 20 percent of the population owns 80 percent of the wealth (the actual numbers are between 15 percent and 85 percent.) But the Pareto Principle goes much deeper than it says. We can examine the top 20% of wealth and calculate the total wealth that the top 20% of the group. Again it is the Pareto principle that is applicable. That means that 4 percent have 64 percent of the riches. Repeat that process, and we'll have approximately 9 people. According to certain estimates, this tiny group holds as much riches as the bottom portion of the world.


Leverage


One reason the top performers get rewarded more than ever is the leverage. In the past, when you were just a nanosecond faster than your competition, it was not a significant benefit. Today, small distinctions in performance translate to significant differences in benefits in the real world. A gold medallist at the Olympics or even one who beats the competition by a nanosecond is not rewarded with a small advantage.


We live in a world based on leverage through capital technology, innovation, and productivity. People who leverage their skills can perform better than unleveraged ones by a factor of ten. If you're leveraging, your judgment is much more critical. The small differences in your ability could be put to greater use.



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