This paper evaluates the causal impact of digital technology adoption (DTA) on firms’ market power using data from Chinese listed manufacturing companies. Employing staggered difference-in-differences strategies, we find compelling evidence that DTA has a significant and substantial positive impact on market power. We also find supportive evidence for several underlying channels through which this impact occurs: improved research and development intensity, the upgrading of human capital structure, enhanced manufacturing servitization, and increased external attention. Furthermore, we establish an inverted U-shaped relationship between the share of DTA firms and resource misallocation within the industry-province dimension. This study contributes to the existing literature on the digitalization paradox by extending the investigation of the market performance of digital transformation to the context of developing countries.