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A public policy blog from AEI
The Democrats’ “Better Deal” policy agenda promises the party will “crack down on monopolies and the concentration of economic power” if returned to political office. It’s an idea also gaining traction on the right. The economic statistics driving this push are the historic highs in US corporate profit margins and the increased sector concentration in US industries. Certainly industry concentration is something to rightly worry about if it results in higher prices and less innovation.
But what exactly is happening here? The “why” matters, especially if trying to figure out whether to “crack down” on big companies through antitrust or heavy regulation. Does government policy — such as weak antitrust enforcement — favor incumbent firms rather than promoting competition? Or do new technologies enable the rise of “superstar” firms in some fashion, such as through winner-take-all/winner-take-most network effects? In a recent analysis, the econ team at Goldman Sachs identified technology as the prime driver:
First, the take-off of information and communication technologies in the mid-90s coincides with the turning point in profit margins (while trade and product market policy data suggest no breaks in the mid-90s). Second, the technology channel is intuitive (e.g. network effects) and consistent with the large market shares of several big US tech firms and their major contributions to the rise in S&P500 profit margins. Third, David Autor and co-authors report that industries with rising concentrations are also the ones with faster productivity growth and patenting activities. Fourth, the rising productivity gap between salient frontier firms and non-frontier firms may help explain why measured aggregate productivity growth has been weak despite a perceived fast disruption.
Backing over those general findings is new research from Boston University’s James Bessen (bold is mine):
Industry concentration has been rising in the US since 1980. Why? This paper explores the role of proprietary information technology systems (IT), which could increase industry concentration by raising the productivity of top firms relative to others. Using instrumental variable estimates, this paper finds that industry IT system use is strongly associated with the level and growth of industry concentration. The paper also finds that IT system use is associated with greater plant size, greater labor productivity, and greater operating margins for the top four firms in each industry compared to the rest. Successful IT systems appear to play a major role in the recent increases in industry concentration and in profit margins, more so than a general decline in competition. … The findings of this paper suggest that much of the recent rise in industry concentration and much of the rise in firm operating margins can be attributed to the deployment of proprietary IT systems. A general decline in competition might also play a role in rising concentration and profits, but the evidence found here regarding competition is mixed. Merger and acquisition activity seems unrelated to industry concentration and the residual time trend in operating margins is negative once intangible investments are taken into account. On the other hand, greater Federal regulation is associated with higher operating margins, although this effect is substantially smaller than the role of IT systems. Overall, the analysis here suggests that the recent overall rise in industry concentration is not mainly the result of anticompetitive activity that should worry antitrust authorities. Indeed, IT systems use appears to bring real social economic benefits in terms of greater output per worker even if it does raise industry concentration.
The natural next question is why aren’t the IT-driven productivity gains more broadly diffused and enjoyed? Again, Bessen:
Increasingly, it seems, top performing firms utilize new technologies productively while their rivals do not. Concentration appears to be rising because of “barriers to technology” if not actually barriers to entry. More research is needed to understand exactly how IT is related to the growing productivity gap. Top firms might be able to use patents and trade secrets to prevent the spread of new knowledge. Or perhaps, instead, top firms are better able to recruit and develop talented managers and workers skilled at working with the new systems. Whatever the cause, the issue is important because the slow diffusion of new technologies might be related to sluggish aggregate productivity growth (Decker et al. 2017). Also, growing disparity in firm productivity might be related to growing inter-firm wage inequality. But the policies to address these issues, whether antitrust or other, depend very much on the diagnosis.
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