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A public policy blog from AEI
The business headlines don’t suggest much is wrong with the US economy. The economic expansion is in its tenth year, incomes are up, economic growth has accelerated, and the jobs keep coming in big bunches as openings hit record levels.
But here’s your trouble if you’re looking for it: Some observers worry that rising monopoly power — as evidenced by higher sales concentration and increases in markups (the amount above cost at which a product is sold) — is working as a slow poison, suppressing productivity and real wage growth. If there was more competition, the economy would be more dynamic, innovative, and broadly rewarding. This is a common part of the activist argument pushing for aggressive antitrust policy, particularly in the technology sector. Washington has been too lax for too long, and Big Bad Tech (to name one industry) is the result.
Then again, maybe globalization and technological progress have changed the nature of competition, creating superstar firms like AppleAmazonGoogleFacebook that take most or nearly all of particular markets. In the new paper “Increasing Differences Between Firms: Market Power and the Macro-Economy,” MIT economist John Van Reenen frames the issue this way: “Is the increase in aggregate markups and concentration due to a general fall in competition or rather a change in the economic environment reallocating more activity towards superstar firms?”
And for now, at least, Van Reenen sees the weight of the evidence suggesting the superstar model offers the best explanation. These firms became dominant by outcompeting — such as through superior use of technology — their rivals. (A good reminder from Van Reenen: The oft-cited differences within companies between high and low paid workers explain very little of the increase in overall US earnings inequality.)
First, most of the change in markups and labor shares “are due to reallocation between firms towards larger, more productive and profitable firms. (Most American firms have seen their markup and labor shares stay steady or decline.) Second, the most concentrated sectors “appear to have rising productivity and innovation which is consistent with reallocation to more efficient and innovative firms.” And third, these concentration and markups trends are roughly similar across advanced economies with differing competition policies. (The economist also thinks we need to look beyond competition issues to explain the more-than-decade-long productivity slowdown.)
So all good? Not quite, according to Van Reenen.
A final word of warning. Even if it was the case that the world is closer to the superstar firm model, this does not mean that antitrust policy should be relaxed. Even if superstar firms attain their currently dominant positions on their merits of outcompeting rivals, it does not mean that they will always use their power for the good of consumers. They may well try to entrench their position through lobbying, erecting entry barriers and buying up future rivals. As larger parts of the modern economy become winner take most/all, it is important that competition authorities develop better tools for understanding harm to innovation and future competition, rather than the traditional emphasis on the pricing decisions of current rivals.
As cautionary notes go, this is a good one. Regulators should be vigilant. And better tools for analysis are a good thing, too. For instance: Researcher Nicolas Petit argues for a more comprehensive view of competition that looks at how superstar firms compete for tech talent and footholds in new markets — all while plowing billions into R&D. And these supposedly forever dominant firms suffer existential dread that their core business will one day be disrupted or displaced by new technologies. This tweet from tech analyst Benedict Evans: “PCs made IBM just another big tech company. Mobile and the web made Microsoft just another big tech company. This will happen to Google or Amazon as well.”
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