Can central bankers win back the public's confidence, maintain global economic stability, and find ways to accommodate widespread technological disruptions all at the same time? That will be a key question in 2019and beyond
The growing dominance of leading technology firms has occasioned an intense debate about the tradeoffs between efficiency and market power, while raising questions about what the changing structure of markets will mean for innovation and the distribution of wealth in the future. The annual Jackson Hole Economic Policy Symposium in Wyoming, organized by the Federal Reserve Bank of Kansas City, offered an excellent set of papers and commentators on the subject.
With respect to efficiency and competition, there is already cause for concern. John Haltiwanger of the University of Maryland has shown that the entry rate of new firms into the market has fallen sharply, particularly over the past 12 years; and Jay Ritter of the University of Florida has demonstrated a similarly steep decline in annual initial public offerings.
These findings suggest that young firms are increasingly agreeing to be acquired, rather than trying to grow into large public firms. At the same time, exit rates within many industries have remained relatively flat despite an increase in productivity dispersion. In other words, weaker producers aren’t being knocked out of the market, implying a lack of dynamism in many sectors of the economy.
Meanwhile, measures of market concentration, such as the share of sales by the four largest firms, are up in a variety of industries in the US, though it is not yet clear what conclusions one should draw from this. There is some debate over whether concentration is also rising in Europe, where somewhat tighter antitrust policies are in place. If it is not, then antitrust policies could explain the difference between Europe and the US in this regard.
Likewise, corporate profitability seems to be higher in the US than in Europe; but, again, it is not clear what that means. Some see it as a sign of increased monopolization in US industries. Others see it as a sign that dominant US superstar firms are innovating more, and reaping the benefits of higher productivity. But if that is the case, one must still confront the reality of low overall productivity growth worldwide. If innovation is so high, why is productivity growth still so low?
Concentrated disruption
Before we get to that question, let us look at what we know. Current research suggests that rising concentration is a reflection not of market power, but of a shift in market share toward better-managed, more innovative firms—the firms that attract the best employees. Having congregated in a few superstar firms, the capable have become super capable.
This would seem to be a good thing, insofar as it suggests that firms are gaining market share by becoming more efficient, and not simply by snatching up other firms while antitrust authorities stand aside. One would expect market concentration/monopolization to lead to higher prices, but there isn’t much evidence of that happening. Of course, firms could be improving efficiency without passing on the savings, in which case even flat prices would be a source for concern.
Another development is the growing importance of “intangibles" such as software and intellectual property, which Nicolas Crouzet and Janice C. Eberly of Northwestern University suggest could be driving an increase in market concentration. Moreover, distinguishing among industries, they show that higher concentration is correlated with rising productivity in some sectors, and with growing market power in others. In consumer-facing industries where Crouzet and Eberly have found productivity gains, Alberto F. Cavallo of the Harvard Business School suggests that consumers have benefited in the form of lower prices. The broader point is that we cannot say definitively that rising concentration has been harmful to consumers.
Still, the healthcare sector offers a cautionary tale. It, too, is heavily concentrated, but dominant firms seem to be intent on squeezing consumers, and they don’t all demonstrate high levels of productivity. The question, then, is whether today’s highly productive superstars in other sectors will eventually go down the same path. After all, while well-known market leaders such as Facebook and Google have been offering many products and services for free (which obviously benefits consumers), their business models have raised a number of pressing questions.
For example, one must consider whether the exchange of personal data for the use of such services constitutes a fair trade. There is also the matter of whom these companies do charge for services, and whether those costs (say, for the advertisements you are forced to watch) are being passed back to consumers.
It remains to be seen if the current arrangement—whereby users get free services in exchange for viewing advertisements and relinquishing data, firms pay platforms to access these customers, and the platforms get a huge network of customers in exchange for their innovative services—will last. More important, there is the as-yet-unanswered question of whether it will preserve dynamism in these markets over the long term.The author is a Professor at the University of Chicago.
FAANGs out
The next important question is whether the structure of key industries is slowing down investment, research and development, or the diffusion of innovation from superstar firms. Most economists would say that innovation is driven largely by competition, both within an industry and further afield, as well as by the threat of future competition. So, even if one is not too worried about the effects of concentration on innovation today, one still must consider whether that could pose a threat to future dynamism.
Here, I think there is reason to worry, given the falling rate of new market entries and the growing tendency among younger firms to be bought out. More often than not, such acquisitions are primarily used by dominant firms to shut down or assimilate new products that might pose a competitive challenge in the future. There is plenty of evidence of this happening in the pharmaceutical industry; but we also know that the FAANGs (Facebook, Amazon, Apple, Netflix, and Google) will resort to such measures as needed....MUCH MORE
He was also Governor of the Reserve Bank of India
HT: Professor Rajan's Booth School of Business homepage.
