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From the many to the few - Companies appear to be gaining market power

That may mean lower pay for workers, and less innovation

COMPETITION forces companies to keep prices low to attract customers. But if a

few firms become powerful enough, they can see off competitors and charge more.

A new working paper by Jan De Loecker of the University of Leuven and Jan

Eeckhout of University College London presents evidence that this is happening

across the rich world.

The researchers examine markups selling prices divided by production costs. At

1, products are sold at cost; above 1, there is a gross profit. Using the

financial statements of 70,000 firms in 134 countries, the authors find average

markups rose from 1.1 in 1980 to 1.6 in 2016.

America and Europe saw the biggest increases (see chart). But in many emerging

markets markups barely rose. In China they fell. That suggests rich-world firms

may have been able to increase markups by outsourcing to cut labour costs.

Another possibility is that corporate concentration may have increased because

of lax antitrust enforcement or the growing heft of companies benefiting from

network effects, like internet firms.

Policymakers should take note. Greater market power for firms may also mean

less bargaining power for workers, and hence lower wages. A recent study 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.

A recent IMF working paper found that companies with relatively low markups

invested more when markups increased, whereas those that had started with high

markups invested less. This was particularly evident in highly concentrated

sectors. And the ratio of dividends to sales was higher for companies with

higher markups. Firms with greater market power, it seems, may not only have

higher profits but innovate less.

Sources:

Global Market Power , Jan De Loecker and Jan Eeckhout, NBER working paper,

2018

"Global Market Power and its Macroeconomic Implications", Federico Diez, Daniel

Leigh, Suchanan Tambunlertchai, IMF working paper, 2018

The Fall of the Labor Share and the Rise of Superstar Firms , David Autor,

David Dorn, Lawrence F. Katz, Christina Patterson, John Van Reenen, 2017