Are U.S. Companies Too Big and Powerful? The Fed Wants to Know

(Bloomberg) -- Have U.S. companies gotten too big and too powerful? Does growing concentration -- more market share in fewer corporate hands -- explain why wage growth has stagnated, income inequality has gotten worse and investment and innovation have fallen behind? These are some of the hottest questions in economic circles these days, and the U.S. Federal Reserve is looking for answers. As central bankers start to meet in Jackson Hole, Wyoming, for the Federal Reserve Bank of Kansas City’s annual symposium, it will be the main topic.

1. Are markets more concentrated today?

Yes, researchers have shown that more than three-quarters of U.S. industries over the last two decades have seen an increase in concentration. These economists have also found that companies operating in more consolidated sectors earn higher profit margins. Markups -- how much a company charges for a product above its own costs -- have soared, another sign of rising market power. These findings are consistent with yet more research showing that a smaller number of firms across the U.S. economy are capturing a greater share of sales, giving rise to so-called superstar companies.

2. What are some examples?

Look no further than global technology giants Google, Apple, Facebook and Amazon. They are among the most valuable companies in the world and dominate their markets, from search advertising and high-end smartphones to social-media traffic and online retail. But airlines, pharmaceuticals, mobile-phone carriers, pay-TV providers, travel-booking services and many other sectors have also seen greater concentration.

3. Why does it matter?

Concentrated markets worry economists and antitrust enforcers because the fewer companies in a market, the less incentive they have to compete by lowering prices or offering more innovative products. Companies that completely dominate a market might be able to charge higher prices even as customer service and product quality decline. But the number of companies competing isn’t always an indication of whether a market is competitive. Look at how Uber Technologies Inc. and Lyft Inc. go head-to-head to compete for riders on city streets. Big companies also can benefit consumers by using their scale to keep prices low (think Walmart Inc.).

4. Why is market concentration getting so much attention now?

Rising concentration has become one of the most talked about issues in economics and antitrust, spurring lots of academic research and debate. At the Jackson Hole confab, participants are expected to discuss why it’s occurring and whether it’s contributing to some economic problems in the U.S. and globally. In the fall, the Federal Trade Commission, one of the U.S.’s two antitrust enforcers, will host a series of hearings on competition and whether enforcement priorities need to change.

5. Is this all about the prices we pay?

No, that’s what antitrust wonks used to focus on. Prices still matter but researchers are looking more broadly. The new thinking is that rising concentration is linked to lower labor-force participation and a decrease in the share of national income that goes to workers. Economists have found evidence that the rise in market power is partly responsible for the decline in corporate investment. One reason may be that dominant companies find they don’t have to invest as much in their businesses to compete. There’s evidence as well that high concentration is associated with lower wages in local labor markets, since workers don’t have much bargaining power when dominant companies are doing all the hiring. And some economists argue that reduced competition and dynamism -- a measure of company startups and failures -- are driving the slowdown in productivity growth and the rise in income inequality.

6. What are regulators doing about market concentration?

Some lawyers and economists argue that antitrust enforcement has become too lax. Officials at the FTC and the U.S. Justice Department, they say, need to get more aggressive in policing mergers and anti-competitive conduct. While merger filings have risen sharply, enforcement actions have remained flat, according to an analysis by the Washington Center for Equitable Growth. Justice Department cases against companies for using monopoly power to thwart competition have also declined.

7. So tougher enforcement is the answer?

It’s more complicated than that. Some academics argue that the rise in concentration across industries simply reflects market forces at work. Many technology companies, including Facebook Inc. and Uber, have grown rapidly because of so-called network effects, in which the more people use a platform, the more it attracts news users. Those effects can create barriers to entry that make it harder for new entrants to compete, cementing the position of dominant companies.

8. Is antitrust thinking outdated?

Modern competition enforcement largely focused on prices and what’s known as the consumer-welfare standard, a framework first advanced by conservative legal scholar Robert Bork in his 1978 book, "The Antitrust Paradox." He revolutionized antitrust thinking by focusing on how mergers can often make companies more efficient, which can increase output and lower prices to the benefit of consumers. That view helped usher in an era of more lenient enforcement. Four decades later, there are growing calls to push the pendulum in the other direction with more aggressive policing of mergers and dominant companies. Some advocate throwing out the consumer-welfare playbook entirely.

9. What’s a monopoly, anyway?

In the U.S., there is no sharp line, but a market share of at least 50 percent is generally needed before courts and regulators take notice. Think of the early 20th-century trusts that controlled oil, railroads and steel. Standard Oil’s market share got as high as 88 percent. It’s not illegal to be big and powerful in the U.S. Gaining a monopoly position from superior products or better management is considered a reward for success in the marketplace. But it’s illegal for a monopoly to take predatory steps to stop rivals that might threaten its dominance. Any attempts to illegally maintain a monopoly -- which federal courts ruled Microsoft did in the 1990s -- is fair game for antitrust enforcers and could result in penalties or a forced breakup.

The Reference Shelf

  • Bloomberg Opinion columnist Peter Orszag and Jason Furman, who chaired the Council of Economic Advisers under President Barack Obama, explore the connection between reduced competition, slower productivity growth and higher income inequality.
  • A Brookings Institution paper on the decline in U.S. business dynamism, a measure of company successes versus failures.
  • A QuickTake explainer on why some consider the U.S.’s giant tech companies as the "new monopolies."
  • Some refer to the idea of rewriting the antitrust playbook to consider broader economic effects as "hipster antitrust."

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