Does America Have an Antitrust Problem?

Markups are not the only way to measure market power, however. “Profits are a better indicator (of market power) than markups,” Zingales says, adding that it’s problematic if a market has highly profitable companies but few new entrants. “We know entry has been going down over time, by many measures, and profitability of the incumbents, especially the largest firms, has been going up. All this is consistent with some market power.”

This, too, invites debate. The growth, or lack thereof, of profits is disputed territory in the economics literature. In research he started as a PhD student at Chicago Booth, London Business School’s Simcha Barkai examined what portion of US economic output has gone to labor, capital investment—such as the facilities, machinery, and technology used for production—and profit over time. He finds that labor’s share of the economy has gone down, a prominent trend in the economics literature that was first documented in 2013 by Chicago Booth’s Loukas Karabarbounis (now at the University of Minnesota) and Brent Neiman. On average, Barkai writes, workers’ share of sales dropped by 10 percent between 1997 and 2012.

But he also finds that the capital share—traditionally assumed to rise when the labor share falls—has also declined. Instead, what has risen is the profit share: according to Barkai’s research, profits increased more than sixfold from 1984 to 2014, from just over 2 percent of gross value added to the economy to almost 16 percent.

Barkai also used census data to identify the share of sales in each industry accounted for by that industry’s four, eight, 20, and 50 largest companies, and used those shares as measures of industry concentration. He finds that industries that had experienced the greatest growth in concentration also had the greatest decline in labor’s share of sales.

“A decline in the demand for labor inputs (which results in a decline in the labor share) and a simultaneous decline in demand for capital inputs (which results in under-investment) are distinctive traits of declining competition,” he writes. Barkai concludes that declines in the capital and labor shares of income accommodate dramatic growth in profits.

But just as markups are difficult to measure, so is the capital share of the economy, a point emphasized in 2018 research by Karabarbounis and Neiman. If growth in the capital share is underestimated, growth in profits will be overestimated.

Karabarbounis and Neiman note that the standard way many economists measure capital costs is incomplete, as it does not account for risk premia, or how much investors have made by taking risks rather than simply holding Treasury bonds. Changes in risk premia may mean that the financing costs faced by companies do not move in lockstep with the interest rate on US Treasuries. If financing costs have not declined all that much, it would imply that profits have not risen all that much, and would call into question whether companies are really profiting from a rise in market power, at the expense of consumers and workers.

Karabarbounis and Neiman argue that the large growth in profits since the 1980s found by some economists, including Barkai, follows from the assumption that company borrowing costs fell along with US Treasury rates. This is a common assumption in economics research, but if applied to earlier decades, it also implies that profits fell dramatically between 1960 and 1980, when US Treasury rates were increasing. Karabarbounis and Neiman write, “One must acknowledge that the same methodology driving inference about rising profit shares since 1980 reveals that profit share levels in the 1960s and 1970s generally exceeded the levels reached today.”

In that case, is rising market power really pushing up profits, at the expense of workers and consumers? Or, once capital costs are calculated differently, are profits rising less than suggested by these recent studies? Karabarbounis and Neiman lean toward the latter conclusion.

Why would market power be expanding?

But let’s assume that market power is growing broadly. If that were true, what might be causing it? Research suggests a number of policies that may be helping it along—and not all of them fall within the traditional bounds of antitrust.

For example, research from Princeton’s Ernest Liu and Atif Mian and Chicago Booth’s Amir Sufi finds that the low interest rates experienced in the US and many other developed economies since the 2008–09 financial crisis may have contributed to declining competition.

Although low interest rates have traditionally been assumed to encourage business spending, the researchers argue that as rates fall, bigger companies can use them to make bigger investments—in new equipment, for example—than their smaller competitors. These more-significant investments carry bigger productivity payoffs, increasing the competitive gap between the big companies and their rivals. If rates are low enough, eventually both big and small companies will lose the incentive to invest, as the small companies will fall hopelessly behind in market share, relieving some of the competitive pressure on their bigger rivals.

Policy around intellectual property (IP) may also be a contributor to declining competition. Research from Stanford’s Mordecai Kurz suggests that rising monopoly power has accompanied the information-technology revolution, and has been protected by the US’s system of patents and other IP rights.

Kurz documents the growth of surplus wealth—the difference between a company’s total wealth and the capital it employs—generated by publicly traded US companies and finds that greater surplus wealth is associated with companies that have been most transformed by IT innovations. He also finds that the rate of surplus-wealth generation over the years corresponds with various phases of the IT revolution, with more wealth generated during particularly innovative periods of the IT era. These findings, he writes, result from a public-policy regime oriented toward encouraging innovation with the promise of monopoly power.

“To encourage innovations, our laws protect patents and intellectual property rights, granting innovators monopoly power over the results of their innovations,” Kurz writes. “But, once an initial monopoly is established, advantages of first mover together with a mix of updated patents, intellectual property rights and trade secrets, make it very hard for potential competitors to enter the market.”

Some explanations for growing market power do come down to matters of antitrust policy. Part of the evolution of US merger policy in the latter half of the 20th century was the introduction of the 1976 Hart-Scott-Rodino Antitrust Improvements Act, which set up requirements for premerger notifications. The act, writes Chicago Booth’s Thomas Wollmann, effectively meant that for any merger in which the target company was worth at least $10 million, the merging companies needed to notify the government of their plan to merge in advance, so that the US’s two antitrust authorities—the DOJ and the FTC—could consider its likely effects on competition. Deals with the potential to impinge upon competition could trigger an investigation; investigations that indicated some likelihood of competitive harm could lead to attempts to block the merger.

In 2001, the act was amended to bump the prenotification threshold to $50 million. Wollmann finds that following the amendment, premerger notifications dropped by 70 percent. Investigations of deals between the old $10 million threshold and the new $50 million mark dropped from about 150 per year to close to zero—now exempt from notification requirements, they are almost never investigated. But that doesn’t mean they don’t pose any competitive threat.

“Notably, 32 percent of all HSR-related investigations prior to the amendment target deals valued at less than $50 million, rejecting the notion that these newly-exempt deals are unlikely to be anticompetitive,” Wollmann writes.

Moreover, firms responded to decreased enforcement with even more horizontal mergers. Wollmann’s findings indicate that many firms—knowing that they were less likely to face antitrust scrutiny after the amendment—became more likely to propose acquisitions of their competitors.

The mergers may be relatively small, but they are large in aggregate: Wollmann finds that over about a 15-year period, transactions exempt from premerger notification reporting consolidated over $400 billion in US output. Over the 10-year period following its passage, “the threshold increase induces 3,240 competition-reducing business combinations,” a phenomenon he calls stealth consolidation.

Furthermore, although growing concentration is not the same as growing market power, some research suggests that they do share an association. Rice University’s Gustavo Grullon, York University’s Yelena Larkin, and University of Geneva’s Roni Michaely find that companies in more-concentrated industries tend to enjoy greater profits—and that these are driven primarily by higher markups. They also find that horizontal mergers in more-concentrated industries elicit a stronger market reaction than those in less-concentrated industries, and that shareholders of companies in more-concentrated industries enjoy higher-than-average returns. The researchers argue that both of these findings reflect the market’s recognition that companies in highly concentrated industries tend to wield profit-enhancing market power.

The trouble with big tech

Many antitrust discussions today quickly turn to the technology industry, and for good reason. The questions of whether market power is becoming more pervasive and, if so, how policy makers should confront it, are complicated by the growth of digital platforms, for which the economic context is different than that for traditional markets. Traditional policy levers might well be sufficient to fix competition in legacy industries, Zingales says, but digital platforms require “more targeted intervention.”

That’s in part because digital industries such as social media and online search are particularly prone to network externalities—that is, the more people use them, the more valuable their services become. These externalities naturally fuel the winner-take-all (or winner-take-most) outcomes that contribute to industry concentration: the more people who use Google to search the web, the more data Google has to help its algorithm generate the most relevant search results, making its search services even more attractive to future customers. Similarly, when many of your friends post their life updates on Facebook, it becomes more appealing for you to do the same—and Facebook’s popularity is self-perpetuating.