Does a rise in market power explain the ills of developed economies?

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The spectacular rise in market power of relatively few companies that practically monopolise their industries, especially in the US, has been a theme in 2018 (see the first companies reaching market capitalisations of US dollar one trillion). The adverse impact of this on the broader economy is a matter of concern and potentially has significant implications for the macro-economic environment. [1]

In recent decades, developed economies have been beset by a number of secular macroeconomic trends, including

  • A long-run decline in labour’s share of income
  • A decrease in the capital share
  • Stagnating/falling wages for low-skilled jobs
  • A growing propensity for prime-aged men to drop out of the labour force, reflected in a fall in the labour force participation rate
  • Declining mobility in the US workforce, with migration rates between US states falling by at least 30% for most age groups
  • A slowdown in output and GDP growth.

Corporate power has become more concentrated in the US economy

A significant body of research suggests that a number of the ills besetting developed economies in recent years is the result of a rise in market power. In the US economy, mark-ups (the difference between what a company pays for the inputs it uses and what it charges for the products it produces) rose from 18% in 1980 to 67% in 2014.

A working paper published in 2017 by Jan de Loecker of the University of Leuven and Jan Eeckhout of University College London presented evidence that a number of corporations have become powerful enough to see off competitors and charge more for their goods and services. The result is greater corporate concentration in the US economy since the early 1990s, with a limited number of players taking home a larger portion of revenues across industries.

Capitalism without capital

This research notes that, at the same time, investment has fallen relative to profitability – capitalism without capital.

In an economy dominated by services, intangible capital (e.g. software, management practices) is vital. Intangible assets mean companies can grow very quickly (think of some of the tech companies that in 10 or 20 years have become world giants by market capitalisation).

In 1975, 109 companies collected half of the profits produced by publicly traded companies in the US; today, just 30 companies collect half the profits.

Greater market power for firms may also mean less bargaining power for workers, and hence lower wages. A study conducted by David Autor of the Massachusetts Institute of Technology and four other economists found that workers’ share of income in America has declined most steeply in the most concentrated sectors.

An environment where the winner takes all…

While these superstar companies operate in a competition-free environment, all the others struggle in a world where pricing power is increasingly rare, forcing them to keep prices low to attract customers – so there is greater polarisation in the corporate sphere.

And that’s not all that market power may explain

As if this were not enough, the increase in market power may provide explanations for other secular trends in recent years:

  • The fall in the start-up rate of new firms due to high barriers-to-entry erected by incumbents with large moats to keep potential new entrants out
  • Declines in long-term interest rates due to a fall in demand for capital (as a consequence of fewer firms with market power) and an increase in the supply of capital (due to higher profits as the winners take all)
  • An increase in wage inequality as wages for low-skilled jobs fall in contrast to an increase for skilled wages via profit-sharing among managers.

What’s behind the rise in market power?

Rapid technological change, allowing companies to better create and preserve situations of market power, is the common factor among the candidate explanations for the rise of market power.

On this basis, it is not obvious why mark-ups should decrease even though they are already reaching heights many times above those previously seen (based on data since the second world war).

[1] also see the section on “Superstar firms increasing in dominance and control” in BNP Paribas Asset Management 2018 Investment Forum: Great instability by Daniel Morris


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