A new study adds to worries about market power
for a “theory of everything” is well-known. The equivalent in economics is the hunt for common causes for the rich-world macroeconomic trends of the past decade or so: a shrinking share of the economic pie for workers, disappointing investment and lacklustre productivity growth. These must be reconciled with low interest rates, pockets of technological advance and juicy returns for investors willing to take risks.
The leading economic theory of everything is that competition has weakened as markets have become more concentrated. Unlike firms in competitive markets, monopolies limit production in order to keep prices and profits high. They can therefore be expected to restrain their investment, too. They might still be innovative—with monopoly profits up for grabs, why not be?—but market power usually makes economies less productive overall.
Case closed? Not so fast. Those who doubt that competition has weakened attribute such findings to the rise of “superstar” firms. They argue that economic activity is becoming concentrated in the best firms because of technology, network effects and globalisation.
Yet market power that grows organically is still market power. The fund found evidence of some of the pernicious consequences of less competition. Higher markups are associated with less investment in physical capital—enough to have lopped a percentage point offin the average advanced economy, it estimates. Top firms with higher markups pay a smaller share of the economic value they create to workers.
That might happen if regulators are slow to respond to structural shifts in the economy, or too lax in policing mergers that allow incumbents to pick off potential competitors. The fund found that mergers and acquisitions were, on average, followed by significantly higher markups by the firms involved. Economists are sometimes accused of having “physics envy”—that is, of coveting the precision of the hard sciences.
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