Economists are increasingly turning their attention to the problem of monopoly. This doesn’t mean literal monopoly, like when one utility company provides all the power in a city. It refers to market concentration in general — when an industry goes from having 20 players to having only 10, or when the four biggest companies in an industry start taking a bigger and bigger share of sales. This sort of creeping oligopoly acts much like a literal monopoly — it raises prices, limits market size and tends to make the economy less efficient.
There’s now evidence that market concentration could also be hurting workers, by decreasing the share of national income that they receive. It’s probably making inequality worse. I also suspect that creeping monopoly will prove to be one of the main reasons for decreasing business dynamism. And it could even be a contributor to slow productivity growth. In other words, many of the diseases in our economy can probably be traced, at least in part, to the problem of market concentration. And it’s getting worse.
But before we devise strategies to fight the tide of monopoly, we need a more complete diagnosis. Why is monopoly power increasing? The best minds in the econ profession are on the case, but there’s no definitive answer yet.
In a previous post, I mentioned a couple of potential causes. The obvious culprit would be a more lax attitude toward antitrust enforcement. If free-market fundamentalism caused the US to be friendlier toward big mergers since the 1990s, this could have encouraged concentration. One problem with this story is that antitrust fines have actually been on the rise:
Another possible cause is regulation. Measured by sheer number of words, the amount of federal regulation has been on the rise.
Regulation can increase monopoly power by raising barriers to entry. If a new startup has to wade through oceans of red tape, pay millions of dollars in compliance costs and develop a whole regulatory compliance infrastructure just to start to be able to compete in a market, it gives the big established players a huge and enduring advantage.
Big companies are able to bear the cost of regulation much better than small ones. If it turns out that regulation is a central reason behind increased market concentration, I’ll have to become much more libertarian.
But there are some problems with the regulation story. Most of the negative trends that economists are worried about — decreased labor income, slow productivity growth, inequality and reduced dynamism — are recent developments.
Most of them have only been significant since about 2000. But federal regulation has been steadily increasing for a number of decades. In fact, the biggest increase was in the 1960s. Also, there’s evidence that the decline in dynamism isn’t associated with increased federal regulation. So we should be careful before concluding that red tape is the problem here.
That leaves technological explanations. A recent paper by David Autor, David Dorn, Lawrence Katz, Christina Patterson and John van Reenen speculates that tech might have enabled the rise of a few “superstar” companies in each industry. The fact that leaders in more concentrated industries also tend to have higher productivity supports this hypothesis. Technology might have simply changed the nature of markets so that the winners take most of the profits. This could happen because network effects have increased. For example, iPhones are popular in part because of Apple’s large app store, and the app store is large because developers want to write apps for popular phones. Or in finance, having a larger network of counterparties could be more important to banks in the internet age.
Another possibility is that better-managed companies are more innovative. As technology has progressed and competition has become more global, continuous innovation has become more important to corporate success than in the past. That would tend to give a bigger advantage to companies whose management is more committed to innovation. Those companies could simply be out-competing their rivals.
A third possibility is that information technology has simply broadened the arena of competition. Prestigious brands are now able to penetrate local markets all over the world like never before, with the power of internet advertising. And thanks to online supply chain management, big corporations can push out regional rivals and small businesses even more effectively.
If technology is behind the increase in monopoly power, it’s going to be a tough problem to solve. The old remedies of antitrust enforcement and increased competition won’t work — the superstars will win and take most of the market, and it will be back to square one. Meeting the challenge of tech-powered monopoly would require radically new policy ideas. I don’t have an answer yet, but economists should start thinking about this.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion