-Technology. National distribution channels such as network television make it easier for an individual to penetrate the market. For example, at one time villages and towns had their own musicians. Now a singer can make a CD and sell it nationally.
-Falling transportation and tariff costs. Goods have gotten lighter. It is easier to send computer discs all over the world than books. CD's are lighter than phonograph records
-- Mental shelf space constraints. We have a limit to the number of items we can keep in our head..."the amount of information we can actually use is thus a declining fraction of the total information available."
-Weakening of regulations and civil society. At one time, informal and formal rules limited the winner take all markets. Now, like free agents in baseball, the top performers have the leverage to demand high prices.
-Self-reinforcing processes. This is another way of saying "success begets success." For example, a sales person does well and gets bigger customers. A person does well and the word of mouth referral causes them to saturate the market. This virtuous cycle increases the income and power of top performers.
...winner take all markets are not good for society. People are unrealistically optimistic about their own chances of winning "a prize." Thus they are siphoned off from other productive endeavors.
http://www.amazon.com/exec/obidos/tg/detail/-/0140259953/
The President of the United States earns far less money than the CEOs of mid-sized corporations. Should we worry that we are not paying him enough to attract qualified applicants? Probably not, for two reasons. First, the perks of the presidency yield a real pay vastly greater than the official salary. Second, the presidency is an example of a winner-take-all competition, and winner-take-all competitions have a tendency to over-attract entrants.1
The argument that winner-take-all contests tend to over-attract entrants closely parallels the argument that the problem of the commons yields inefficiency: people respond to average benefit rather than to marginal benefit. An example may help explain the logic involved.
Suppose we have a two-occupation world. The inhabitants of Nirvana can be peasants, at which they all are equally good and produce output valued at $1000 per person. (We can assume there is an export market to avoid the problem of diminishing marginal utility and a downward-sloping demand curve.) Or they can compete to be the ceremonial chief which has benefits to the winner of $100,000 and nothing at all to the losers. The value of the chief to the inhabitants depends on the quality of chief.
Suppose further that each year the inhabitants have to make a decision to be peasants or to compete to be chief. Also assume that at the beginning of each year no one has any reason to believe he is any more or less likely to be able to win the competition even though abilities are not equally distributed for this task. How many people should compete for this job? If all were equally able, or if we could identify the best candidate from the start, the answer is, "Only one." If all were equally able, we could select one by lottery, and if we could identify ability with a simple test, we could use that test to select the winner. But suppose the situation is more complex, and that only after a year of intensive training will the best candidate be apparent. The larger the group of persons who compete for the position, the more talented the winner can be expected to be. (For the same reason we expect a high school that has 10,000 students to dominate athletic competition with a high school with only 100 students--the bigger the pool of possible athletes, the more likely it is that one with exceptional talent will emerge.) What is the best number, the economically-efficient number, of candidates?
Using marginal principles, we can see that the society should continue adding candidates to the pool as long as adding another increases the expected return by more than $1000 (the value of the candidate as a peasant). If a pool of ten candidates can be expected to yield a chief whose value in the job is $70,000, and a pool of eleven applicants can be expected to yield a winner who provides $72,000 worth of value, then it is in the interests of the society to have at least eleven competing. If adding the eleventh candidate increases expected yield only to $70,900, then the society would get more value if the eleventh applicant remained a peasant. As the pool gets bigger, adding an additional person can be expected to yield diminishing returns.
How will the applicants see the competition? Suppose there are only ten in the pool. Would another person find it attractive to join knowing that the value of the position to the winner will be $100,000? If each thinks he has an equal chance to get the prize, the expected value of entering is $10,000, and this would draw in additional people if they are not bothered by the risk. In fact if they were risk neutral and understood the payoffs, one hundred people would want to be in that pool because they will keep joining as long as the average expected value is greater than $1000. But since the average expected value will fall as more people join, the marginal expected value must lie below the average. Hence, if the value of being chief as perceived by the society is not much smaller than the value of being chief as seen by the winner, there will be a tendency for too many candidates to compete for chiefdom. Nirvana would be better off if some them remained peasants. 2
Political offices, NBA basketball careers, and lives as Hollywood movie stars are examples of competitions which are either winner-take-all competitions, or a very close to winner-take-all situations. There is a fixed number of players who fit on the rosters of the NBA teams, and while there is not fixed number of movie stars, the number that people can pay attention to and that can be featured on the tabloids is quite limited. Do we see too much effort expended competing for these positions? Many observers believe so. For every person who makes it into one of these financially rewarding positions, there are hundreds or thousands who, despite great effort and sacrifice, do not make it.
So back to are original question--do we pay the president enough? The answer is, "Yes, unless the value to the citizens of a good president is considerably bigger than the value the president gets from holding the office." Perhaps you find the argument that the value of having a good president is so large that we need even more people wanting to be president, but I do not.
http://ingrimayne.com/econ/resouceProblems/WinnerTakeIt.html
