America's Superstar Companies Are a Drag on Growth
Here’s a story about the U.S. economy that more people are telling these days. Since the 1980s, antitrust enforcement has gotten weaker. As a result, a few big companies have managed to capture a much bigger share of the market in various industries. Technology may have helped too, by letting big companies spread their geographic reach, and by creating network effects that keep customers locked in to platforms like Facebook. Anyway, as a result of this increased market power, the big superstar companies have been raising their prices and cutting their wages. This has lifted profits and boosted the stock market, but it has also held down real wages, diverted more of the nation’s income to business owners, and increased inequality. It has also held back productivity, since raising prices restricts economic output.
Like all big, sweeping theses about the economy, this story can’t be proven or disproven with a single research paper, or even a dozen papers. But like detectives, economists can probe various pieces and see how each one checks out. In the past few years, researchers have found that industrial concentration -- measured by the market share of the four biggest companies in an industry -- has indeed been increasing in most parts of the U.S. economy. They’ve documented a correlation between industrial concentration and a decline in labor’s share of national income. They’ve confirmed that profits have risen substantially. They’ve documented a slackening in the enforcement of antitrust law. And they’ve found some evidence that after mergers, prices go up while productivity doesn’t improve.
Now, a series of new papers provides even more support for key aspects of the story. The first, a paper by economists Jan de Loecker and Jan Eeckhout, has caused quite a stir in the economics press and on the blogs. De Loecker and Eeckhout find that markups -- the amount that companies charge over and above their costs -- have been on the rise since about 1980. Back then, according to the authors’ estimates, the average company charged a price that was about 18 percent above costs -- now, the number is 67 percent.
The authors then use some very simple econ models to link a rise in markups to declines in labor’s share of national income, low-skilled workers’ wages, reduced labor force participation and a slowdown in the broader economy. It all fits with basic economic theory -- less competition leads to increased market power, leading in turn to all sorts of bad economic outcomes.
The second paper, by German Gutierrez and Thomas Philippon, looks at declining levels of business investment. Basic theory suggests that when top companies get more market power, they invest less in their businesses as they restrict output and raise prices. Market power could therefore be one big reason for the decline in U.S. business investment:
The authors look at historical episodes where competition increased -- an unusual wave of new companies in the 1990s, and increased Chinese competition in the 2000s. In each situation, industries where competition increased more also tended to invest more. Again, this is consistent with the story that market power is holding back the U.S. economy. Gutierrez and Philippon have another paper where they test eight different economic theories to explain falling business investment, and find that market power -- along with corporate short-termism -- is the most likely explanation.
Another paper, by Gustavo Grullon, Yelena Larkin and Roni Michaely, takes another look at industrial concentration. They find that in industries that have become more concentrated, profits have risen. And they verify that concentration has been caused by megamergers among public companies, not by some companies going private and disappearing from the records.
A final paper, by economists Mihir Mehta, Suraj Srinivasan and Wanli Zhao, finds evidence of political influence driving antitrust enforcement. Mehta et al. discover that when a company trying to do a merger happens to be headquartered in the district or the state of a politician who oversees antitrust enforcement, the merger is more likely to be approved. This lends credence to the idea that political factors have helped drive the wave of consolidation that has made U.S. industry more concentrated.
So with study after study, the evidence for the market-power story is piling up. One key piece of evidence is still missing -- whether mergers tend to reduce output in an industry. That, along with more general evidence that megamergers have tended to raise prices, would complete the puzzle. It would confirm beyond a reasonable doubt that market power is harming the U.S. economy.
But even without that smoking gun, the evidence in favor of the story is piling up. Some economists remain skeptical, but the steady accumulation of high-quality research papers is becoming hard to dismiss. Now it’s up to our elected leaders to start strengthening antitrust enforcement.
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James Greiff at email@example.com