January 23, 2021

Growing market power | Economy

Growing market power | Economy

The existence of sufficient competition among companies is one of the necessary conditions for the market-based economic system to work. Economics books tell us that, under conditions of competition, the price of a good equals its marginal cost, resulting in producing an additional unit of product. But here, too, reality is far from the manuals. The diversity of entry barriers to the markets and the capacity to differentiate the supply of the companies end up allowing them to set prices that are very different from this marginal cost and to do so with ample discretion, generating benefits of monopolistic conformations.

In recent years there has been evidence that this competition is shrinking in a good number of sectors in advanced economies. Market power is increasing, the ability to set margins for companies, especially the very large ones. In addition to the regulatory and supervisory authorities of competition, governments must pay special attention to this monopolistic drift, insofar as its implications affect the general welfare and the necessary efficiency in the allocation of resources in any economy. If an economy is not perfectly competitive, the factors of production are not allocated optimally. Companies that have the discretion to set prices end up producing less.

The evidence is important, although depending on the research, the causal priority of the phenomenon varies. Thus, an investigation by FJ Díez, Daniel Leigh and S. Tambunlertchai, within the International Monetary Fund, has estimated the evolution of the margin ratios on the cost of producing an additional unit of its product in companies listed in 74 countries. , from 1980 to 2016. The conclusion is unequivocal: in advanced economies, these margins, the most expressive of the measures of market power, have increased by an average of 39% since 1980 in practically all industries and economic sectors. Not only in the large technology companies, where much of the recent attention has been focused on the tendencies towards concentration.

These authors find a positive relationship between margins and other indicators, such as benefits or industrial concentration. It is also noteworthy that in the most concentrated industries they detect a negative relationship between margins and investment and innovation, just as the association between margins and the share of labor income in the total is negative.

Excessive market power is another, no less disturbing, form of that less equal opportunity

This fall in the share of labor income had already been detected by other investigations. Those like those of Piketty that had identified the accumulation of capital as a fundamental cause, or those that explain it by the increasing automation of tasks traditionally performed by workers or the rise of companies called superstars, those capable of extracting increasing margins given their position dominant in certain markets, not only in the information and communication technologies (ICT).

To confirm this trend is added one of the most widely disseminated research recently, which are authors Jan De Loecker and Jan Eeckhout (The Rise of Market Power and the Macroeconomic Implications, NBER). They attribute to this growing market power of the last two decades not only the fall in the share of labor income and the increase in the shares of capital income. Also the decrease in the wages of workers with lower qualifications, that of migratory flows and, in short, that of aggregate production. This would also explain the decrease observed in private investment, despite the increase in corporate profits after overcoming the crisis. The latter must be taken with caution, given the rise in recent years of investment in intangible assets, much less easy to measure.

Although, on the other hand, the scalable nature of these intangible investments, of course software, have been able to facilitate an increase in the degree of concentration in the industry, according to Nicolas Crouzet and Janice Eberly (Understanding Weak Capital Investment: The Role of Market Concentration and Intangibles). In fact, these authors point out that the rise of intangible assets is largely determined by the leaders in the industry and coincides with increases in their market share and in the concentration of the corresponding sector.

A new explanation is proposed by Gene Grossman, Elhanan Helpman, Ezra Oberfield and Thomas Sampson (The Productivity Slowdown and the Declining Labor Share, CEPR Discussion Paper 12342). The decline in productivity, also documented widely for several countries, must have been the main cause of this lower share of labor income in favor of capital. Something that is not limited to the American experience and that is not exactly recent either. On the other hand, David Baqaee and Emmanuel Farhi (Aggregate Productivity and the Rise of Mark-ups) argue that approximately half of the growth in aggregate productivity in the last 20 years can be attributed to companies with high margins. This would help to explain the relatively low technological progress, already advanced by Robert J. Gordon, and that of productivity, which would have been significantly higher if that ability to raise margins had been lower. Something that once again underlines the weakening of business dynamism as one of the most generic and relevant implications of the rise of market power.

The disturbing implications do not end there. The significance of these evidences justified that the last central bankers' convention of Jackson Hole dealt with the consequences of business concentration on the definition and implementation of economic and, specifically, monetary policies (Changing Market Structure and Implications for Monetary Policy ). This link between the competitive structure of product markets, macroeconomics and the definition of monetary policy is, however, a less researched area and one in need of more refined metrics in marginal margin and marginal cost estimates. This explains why the conclusions of some of the research presented in this forum are more cautious, but no less relevant, for the correct application of monetary policies.

In short, it is not only consumer protection that is at stake if the evidence is strengthened about the distortions generated by the greater market power. The proven ability and speed with which some companies find creative ways to obtain monopolistic benefits should find a due response in the regulatory and supervisory authorities of the competition. In a recent article, the prestigious professor at the University of Chicago Eric Posner and Yale professor Glen Weyl, authors of a book that promises to be interesting, Radical Markets: Uprooting Capitalism and Democracy for a Just Society, remind us of the comedian's comment Chris Rock: "If people knew how rich the rich are, there would be riots in the streets", to conclude that the rise of populism that we are observing in a good part of the world, although it does not count as street riots, "reflects the disenchantment not only with the governments, but with the liberal democracy itself ". Excessive market power, in short, is another form no less disturbing of that less equality of opportunities that is undermining the foundations of the system and its main institutions.


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