Why Fewer Startups Thrive: The Hidden Role of Aging and Consumer Brand Loyalty

In a new working paper released by the National Bureau of Economic Research (NBER), economist Gideon Bornstein, affiliated with the Wharton School of the University of Pennsylvania and drawing on data provided through the Kilts Center for Marketing at the University of Chicago Booth School of Business, presents a bold explanation for two of the most significant long-run trends in the U.S. economy: declining business dynamism and rising corporate profitability. The report argues that shifting demographics, not just technology or policy, are reshaping the business landscape. As the American population ages, Bornstein finds that consumers become more loyal to existing brands, reducing competitive pressure and enabling incumbent firms to raise prices, while making it more difficult for new entrants to gain a foothold.

Aging America, Loyal Consumers

At the heart of Bornstein’s theory lies consumer inertia, the tendency of individuals to stick with brands they have previously used. Drawing on Nielsen’s Consumer Panel Dataset, which tracks the purchasing habits of around 160,000 U.S. households from 2004 to 2019, Bornstein shows that younger consumers are significantly more willing to try new products and switch brands. Specifically, 27% of brand sales to young households are made to first-time buyers, compared to only 23% for older households. While a four-percentage-point gap may appear small, its macroeconomic effects are powerful when scaled across millions of transactions.

As the share of young consumers declines, down from 43% of households in the 1980s to 33% by 2015–2019, the market skews toward consumers who are less responsive to price differences and more resistant to switching. This increased inertia strengthens the market position of existing firms, allowing them to raise prices without fear of losing customers, while new firms find it increasingly difficult to penetrate entrenched consumer loyalties.

A Model of Markets in Motion

To rigorously analyze these dynamics, Bornstein develops a general equilibrium model featuring overlapping generations of households with varying switching costs. In this framework, younger households face lower inertia, acting as a catalyst for market competition. Older households, in contrast, face higher costs, psychological, informational, or logistical, when switching brands, which reduces their price sensitivity. Firms in the model build their customer bases over time and adjust their pricing strategies based on two motives: harvesting and investing. The harvesting motive reflects the desire to extract more profits from loyal customers, while the investing motive involves setting lower prices to attract new buyers.

Entrant firms, which begin with no customer base, are driven primarily by the investing motive and thus charge lower prices. Over time, as firms accumulate loyal customers, they shift toward harvesting, raising markups, and increasing profits. The model also includes entry costs and firm exit decisions, which are determined by profitability and fixed operating costs. By calibrating this model using data from the 1980s, Bornstein is able to isolate the effects of demographic change from other structural shifts in the economy.

Fewer Startups, Fatter Margins

The calibrated model generates striking results: population aging alone accounts for approximately 30% of the increase in the profit share of GDP since the late 1980s, and 20% of the decline in the share of young firms, defined as those five years or younger. It also predicts that these trends will persist and intensify in the coming decades. As the share of young consumers continues to fall, entry rates will decline further and markups will rise, reinforcing the market dominance of incumbents.

Empirical data backs these predictions. Merging retail pricing data from Nielsen with wholesale cost data from PromoData, Bornstein finds that entrant brands charge markups that are 5–9 percentage points lower than those of incumbent brands. Cross-state analyses reveal that states with steeper declines in the young population experienced larger drops in young firm shares. For example, Wyoming saw its share of young adults fall by 13 percentage points between 1980 and 2019, a trend mirrored by declines in local firm formation. Similarly, product categories with younger consumer bases, such as energy drinks and tech gadgets, show higher brand entry rates and lower markups.

Reimagining the Sources of Market Power

This research challenges the prevailing assumption that rising market concentration and profits are driven solely by supply-side factors such as technology or deregulation. Instead, it points to a more subtle but powerful force: the aging of the consumer base. As older consumers dominate demand, markets naturally become less dynamic. This opens a new dimension for economic analysis and policy discussion. If consumer inertia stems from behavioral biases or information gaps, then targeted interventions, such as price transparency tools, switching incentives, or public awareness campaigns, could help mitigate the resulting market power. However, if inertia reflects rational choices based on brand satisfaction, convenience, or trust, then interfering might generate inefficiencies or consumer dissatisfaction.

The Future of Innovation in a Static Market

The paper also raises concerns about innovation and long-run growth. In a high-inertia economy, new firms face longer and costlier paths to building market share. This may not only discourage entry but could also stifle the diffusion of new ideas and technologies. Since young firms are often the engine of innovation and creative destruction, a demographic drag on their growth could reduce overall economic vitality. Bornstein suggests that future research should examine how firms might respond by investing more in marketing or advertising to overcome inertia, or whether government policy can play a role in lowering the effective cost of consumer switching.

The report offers a fresh perspective on one of the most consequential structural changes in the U.S. economy. By linking population aging to market power through the lens of consumer behavior, the paper invites economists and policymakers to rethink how demographics shape the very structure of capitalism.