It's a winner-take-all market.

• Author: Frank, Robert H.
• Position: Top money goes to top performing people or products

For a parable in modem economics, consider the local opera house; At the turn of the century, Iowa alone had more than 1,500 of them. Thousands of sopranos earned adequate, if modest, livings from their live performances. But now, thanks to modem recordings, the world's best soprano can be literally everywhere at once. And since it costs no more to stamp out compact discs of Kathleen Battle's Mozart arias than her understudy's, most opera fans Esten to Battle. Thus Battle earns several million dollars a year while most other sopranos, many of whom are almost as talented, struggle to get by.

In similar fashion, the printing press enabled a handful of the world's best storytellers to replace millions of village raconteurs. The electronic newswire allowed a small number of syndicated columnists to displace a host of local journalists. Only a few thousand boxing fans saw Dempsey defeat Tunney in 1927, but now, thanks to pay-per-view, millions of fans can watch the world's best heavyweights and pay for the privilege.

Kathleen Battle, Stephen King, George Will, Mike Tyson and others like them sell their services in a what we call the "winner-take-all" market. The very best in their fields prosper, while the rest barely get by. To understand the phenumenon--and why it has gone from characterizing a few professions to being a central economic fact--you must look to the so-called information revolution. As communication becomes ever more efficient, and as political borders become less and less important, the potential market for a good or service rapidly expands. The number of fax machines worldwide rose from 300,000 in 1983 to 8 million in 1992. During the same period, the population with access to the Internet grew from 1,000 to over 25 million. International phone calls are cheaper than ever, as is transportation.

In this global village, the top players--those who can deliver the best product--can earn enormous profits. Consider Acme Radials, a hypothetical tire company in Akron, Ohio. If Acme were the best in, say northern Ohio, they were once guaranteed a decent business. But today's sophisticated consumers increasingly purchase their tires from only a handful of the best tire producers worldwide: If Acme is one of the best, it wins and its profits will skyrocket; otherwise, its future will likely be bleak.

This same dynamic is at work for individuals. As the world's hospitals are linked by high-speed data-transmission networks, for example, the world's most gifted neurosurgeons can assist in the diagnosis and treatment of patients thousands of miles away--cutting into the business of other doctors and earning enormous sums of money themselves.

In many ways, this is a disturbing phenomenon. Consider the growing gap between rich and poor--perhaps the most pressing economic problem of our time. Scarcely a week passes in which the national media fail to report new evidence of the growing gap--The New Yorker's article, "Who Killed the Middle Class?" is only one recent example. Between 1980 and 1990, the number of workers earning more than $120,000 (in 1990 dollars) doubled from half a million to one million. The top one percent of U.S. earners have captured more than 40 percent of all economic growth since 1973, while the median wage fell 15 percent in real terms, and the bottom fifth of all earners fared even worse.

Our claim is that the growth of "winner-take-all markets" has played an important role in the expansion of inequality and that these markets also make the economy less productive and stunt growth. Understanding this trend is crucial, so we can adjust fiscal policy accordingly. Winner-take-all markets are strikingly different from traditional textbook markets, such as those in which wheat and work shirts are traded. And--no surprise--the old economic policies that make sense in a textbook world are...