To what extent are modern firms using data to create market power?

To answer this question, economists typically look to markups for evidence that data-intensive firms’ prices are above their marginal costs. Using a simple model with firms that price risk in their capital allocation and production decisions, we highlight the competing forces that make markups an unreliable measure of data-derived market power. Instead, we show how markups measured at different levels of aggregation reflect data and distinguish data from other intangible investments. These findings both reconcile seemingly contradictory empirical evidence and guide us to new ways of measuring data and its effects on markets.