Opinion | The mystery of the missing competition
Market concentration in the US and elsewhere, and the rise of superstar companies, could have global consequences
Is market power in the US becoming increasingly concentrated among a handful of superstar firms? The great and the good of the global central banking community sounded a warning note about this at the annual Jackson Hole symposium late last week. If such fears are well-founded, it has implications for a wide range of economic ills, from inequality to low productivity growth.
A substantial amount of evidence suggests that there is something to them. A widely cited 2017 paper by Gustavo Grullon, Yelena Larkin and Roni Michaely, Are US Industries Becoming More Concentrated?, found that over the past two decades, over 75% of US industries have become more concentrated, with dominant companies capturing greater market share. In another 2017 study, Jan De Loecker and Jan Eeckhout examined US firm-level data going back to 1950, and noted that markups have risen from an average level of 18% above marginal cost in 1980 to 67% now. That hints at a break in the circuit somewhere: Rising markups should attract competition, bringing them down again.
Such concentration isn’t confined to the US. Research by The Economist and the Resolution Foundation has found that if the British economy is split into about 250 sectors, “in nearly 60% of them, the four biggest firms claim a larger share of revenues than they did a decade ago”. Profit margins have risen by nearly 80% since 1980, disproportionately skewed towards larger companies. For that matter, there is a healthy amount of concern about similar problems in Japan.
This is a headache for everyone from central bankers to competition regulators and politicians. For instance, does the entrenchment of corporate power at the top of the ladder explain why the Phillips curve is out of whack in the US? Recent research by the Roosevelt Institute, which looks at market concentration from the perspective of workers rather than firms, suggests it could be. The institute found a relatively high degree of monopsony in the US labour market—and that such labour concentration resulted in lower wages. That sheds light on the broken link between employment and inflation in the US.
Such a divergence between labour wages and corporate profits and power fuels the resentment of the political and economic elite that is currently widespread in the US. Given the global impact of the Federal Reserve’s monetary policy and US trade policies pushed by a political establishment trying to tamp down the resentment, this is the world’s problem. There are long-term structural risks, too. Greater concentration and higher markups may initially result in more investment in innovation, but once competition has fallen below a certain threshold, that investment could taper off.
Surely if US trustbusters—notably less active than their European counterparts—got busy, it would nudge the market in a healthier direction? But this is where things get tricky.
First, there is a respectable minority when it comes to the consensus about market concentration and its effects. Competition economist Carl Shapiro has argued that the current research on competition looks at overly broad categories, and mixes up national and local data, blurring the picture. Other economists have pointed out that if overhead costs, such as marketing, are added, markups become much less attention-worthy. Their doubts should be taken on board. Government interference in markets on the basis of a faulty diagnosis can have a chain of unintended negative consequences.
Second, in sectors such as tech, where the rise and rise of superstar firms such as Google and Facebook makes arguments against concentration moot, the question of consumer benefit arises. The scale and market power of big-tech has enabled it to pump money into innovation and provide services that are cheap or free. This combination has resulted in massive benefits for consumers: Think of the myriad ways in which Google’s many free products ease the friction of daily life, or the boost these companies have given to everything from healthcare to financial inclusion. Trustbusters must now consider if this cost-benefit ratio is, in fact, a barrier to entry for competition. Balancing such hypotheticals and counterfactuals is far from an exact science.
Third, recent research points to the growing role of “intangible capital”, such as software, intellectual property and creative business processes, in aiding market concentration. The nature of such capital means that it is in itself a formidable barrier to entry; smaller firms often lack the resources to compete on these fronts. Perhaps worse, it poses a problem for monetary policy that is beyond the central bankers’ power to address. Such intangibles are less responsive to interest rates than physical capital, which robs a central bank of its primary weapon to spur private capex.
These factors make for a complicated, multifaceted problem. Any efforts to tackle it will have to be on various fronts, from overhauling competition regulation to tightening corporate governance norms. And these will be long-term projects that will include a fair amount of trial and error. Global markets should be ready for the fallout.
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