The Interaction of Market Power and Dynamic Capabilities in Shaping Digital Transformations Success

This study examines how dynamic capabilities interact with imperfect competition to shape the performance outcomes of corporate digital transformation. Building on an oligopoly model that integrates automation and digital innovation choices, we show analytically that market power and dynamic capabilities act as strategic complements, jointly amplifying the returns on digital investments. Using a global sample of 545 incumbent firms across seven industries, we find strong empirical support for this prediction: transformational capabilities and asymmetric market positions significantly increase the return on digital technologies, especially for early adopters and firms with an innovation-biased strategy. The study demonstrates research rigour by combining a micro-founded structural model with extensive econometric validation, including instrumental-variable estimation, multiple robustness checks, and industry- and geography-adjusted controls. Our results offer new insight into why digital returns are highly skewed across firms and explain why many incumbents experience limited performance gains despite large investments in digital technologies.