Amid the din of daily political combat, it’s easy to overlook long-term trends reshaping the country. The stock market has quadrupled since 2009’s Great Recession low, but the growth of real wages has failed to accelerate, even as unemployment has fallen from 10% to under 4%. An International Monetary Fund paper published earlier this month suggests these developments are linked to a single cause—increasing corporate concentration throughout the U.S. economy.
A standard definition of market power, say the authors of the IMF paper, is the ability to maintain prices above marginal cost—the level that would prevail under perfect competition. They find that between 1980 and 2016, markups by U.S. companies have increased by an average of 42%. Although markups have risen in all major industry sectors, some have experienced increases far above the average, led by 419% for biotechnology. Not surprisingly, there is a strong relationship between markups and profitability.
There is also evidence that markups are related to market concentration, which has surged in recent decades. Since the mid-1990s the standard measure of concentration used in antitrust analysis, the Herfindahl-Hirschman Index, has risen by 50%.
These findings have important real-world consequences, says the IMF. At first higher markups are associated with increasing investment in both physical plant and research and development. But beyond a certain point the relationship reverses. “At higher levels of markups, or at higher levels of market concentration,” the authors find, “the marginal relation between innovation and markups becomes negative.” In short, as a firm’s market position strengthens, its incentive to invest in innovation decreases. If we care about the pace of innovation in the economy, we have reason to resist excessive levels of sectoral concentration.
There’s another reason to care about companies’ rising market power: as the level of concentration rises, the IMF paper concludes, firms can appropriate “a growing share of the rents from production,” leaving less for labor. Unlike the relationship between concentration and innovation, which takes the shape of an inverted U that rises and then falls, the relationship between concentration and returns to labor is linear: The higher the market concentration, the lower the labor share.
Rising market concentration means more for profit and less for labor. This helps explain why wages have increased so slowly since the Great Recession even as the stock market has soared. If we have reasons to care about workers’ ability to share in the growth of their firms—and we do—we have little choice but to rein in market concentration when it upsets the balance that makes the American dream possible.
This conclusion has nothing to do with a sentimental attachment to small business, let alone an ideological preference for individual producers. As modes of production change, so will the scale of production. Some technologies make smaller companies more profitable, while others push in the opposite direction. In the aggregate, technological change has made possible increased economies of scale, an evolution we have no compelling reason to resist.
“Too much of a good thing is wonderful,” said
She was an acute social observer, but not much of an economist. If big is beautiful, it doesn’t follow that bigger is even more beautiful. Beyond a certain point, which can only be determined empirically rather than theoretically, growing company size has perverse consequences. The practical question is whether we will accept these consequences as unavoidable or use public policy to resist them.
The time has come to reinvigorate antitrust enforcement. The current guidelines state: “Mergers that cause a significant increase in concentration and result in highly concentrated markets are presumed to be likely to enhance market power.” Although this is the right principle, in practice regulators have adopted an excessively restrictive definition of what counts as a significant increase. This has led to a myopic focus on the most highly concentrated sectors—those with four or fewer competitors—even when somewhat less concentrated sectors also experience rising market power. The Justice Department and the Federal Trade Commission should adopt a broader view.
In addition, companies in concentrated sectors can engage in two different forms of anticompetitive behavior—“exclusionary” conduct that prevents new competitors from entering a market, and “exploitative” conduct that allows dominant parties to take advantage of their market power. At present, U.S. regulators have few tools to address the latter abuse, forcing the government to rely on public shaming to counteract predatory pricing such as Mylan’s notorious 400% price hikes for its EpiPen.
We can argue about the details, but without more effective measures to counteract hyperconcentration, American workers will continue to draw the short straw.
Appeared in the June 20, 2018, print edition.