From Tim Harford, the Undercover Economist:
One of my first economics lessons contrasted perfect competition,
which was judged to be a good thing, with monopoly, which was not. There
are worse places to begin than by being shown the difference between
championing the miracle of the free market and favouring the
depredations of dominant businesses.
But monopoly power has often seemed like yesterday’s issue. Standard
Oil was broken up in 1911; AT&T in 1984. To the extent that we
economists worried about companies being too big, we were thinking about
the systemic risks from banks that were too big to fail. But we are
starting to notice again the risks not of corporate failure but of
corporate success.
The most obvious examples are the big digital players: Google
dominates search; Facebook is the Goliath of social media; Amazon rules
online retail. But, as documented in a new working paper by five economists, American business is in general becoming more concentrated.
David Autor and his colleagues looked at 676 industries in the US —
from cigarettes to greeting cards, musical instruments to payday
lenders. They found that for the typical industry in each of six sectors
— manufacturing, retail, finance, services, wholesale and
utilities/transportation — the biggest companies are producing a larger
share of output.
For example, in the early 1980s the largest four players in any given
US manufacturing industry averaged 38 per cent of sales; three decades
later the figure was 43 per cent. In utilities and transportation the
typical market share of the biggest four companies rose from 29 per cent
to 37 per cent. In retail, overshadowed by Walmart and Amazon, the rise
was dramatic: 14 per cent to 30 per cent.
This is surprising. As the world economy grows, one might expect
markets to become more like the perfectly competitive textbook model,
not less. Deregulation should allow more competition; globalisation
should expose established players to pressure from overseas; transparent
prices should make it harder for fat cats to maintain their position.
Why hasn’t competition chipped away at the market position of the
leading companies? The simplest explanation: they are very good at what
they do. Competition isn’t a threat to them. It’s an opportunity.
What Professor Autor and his colleagues call “superstar firms” tend
to be more efficient. They sell more at a lower cost, so they enjoy a
larger profit margin. Google is the purest example: its search algorithm
won market share on merit. Alternatives are easily available, but most
people do not use them. But the pattern holds more broadly: superstar
firms have grown not by avoiding competitors but by defeating them.
This is not entirely bad news. But it’s not entirely good news,
either. The superstar firm phenomenon is the best explanation we have of
a little-noticed but worrisome trend: since 1980, in the US and many
other advanced economies, workers have been getting a steadily smaller
slice of the economic pie (the distribution of this labour income also
became much more unequal during the 1980s and 1990s)....MORE
See also June 5's
"Crazy in ETF love? New Study Imagines Bottling Star Quality" (returns to capital, predatory pricing etc., not the Tony awards).
