Digital Transformation, Firm Boundaries, and Market Power: Evidence from China’s Listed Companies

Abstract

Digital transformation is seen as an “elixir” for companies to improve their economic performance and expand their market power in the digital economy. Therefore, how does digital transformation affect enterprises’ market power? This paper used machine learning to construct a digital transformation index and used panel data of listed enterprises from 2008 to 2020 to study the impact of digital transformation on market power and its mechanism of action. The findings showed that digital transformation significantly increases market power, and this conclusion still holds after considering potential endogeneity issues and conducting robustness tests. The results of mechanism analysis revealed that digital transformation facilitates endogenous scale expansion and promotes merger and acquisition (M&A), which reshapes firm boundaries and, thus, enhances market power. This paper revealed new changes in the micro-organization of enterprises in the context of digital transformation and provided micro-evidence for the industrial organization effect of digital transformation.