Superstar US companies are a drag on growth
HERE’S a story about the US 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 US 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 anti-trust 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
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.
the rise since about 1980. Back then, according to the authors’ estimates, the average company charged a price that was about 18 per cent above costs – now, the number is 67 per cent.
The authors then use some very simple econ models to link a rise in markups to declines in labour’s share of national income, low- skilled workers’ wages, reduced labour 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 US 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 US 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. — WPBloomberg