Fewer US companies are controlling more market share as industrial concentration has settled over the US economy during the past two decades. That trend has provoked fierce debates among economists and politicians over whether the government should do more to break up big companies, especially the dominant technology giants.
But what if industries are concentrating because size confers real benefits to the economy rather than because of lax antitrust enforcement?
That's where the evidence points in forthcoming research by a team of leading economists at the Massachusetts Institute of Technology, Harvard University, the University of Chicago and the University of Zurich. Their study gives reason to be cautious about the growing enthusiasm for inadequate enforcement as the explanation for increased concentration.
In 2015, the economist Jason Furman of Harvard and I took note of the emergence of growing disparities across US companies, with the leading firms in each sector outpacing others in productivity, return on capital and market share. We highlighted the emergence of superstar firms that were earning high returns, enjoyed high productivity and paid high wages. But we weren't able to tease out what was causing those trends, and thus were forced to admit that "our only real conclusion is thus that more attention needs to be paid to what is driving firm-level trends in the United States."
In the years since, the topic has received increasing attention from economists, policymakers and presidential candidates. One view of the facts and causes is laid out in a new book by the New York University economist Thomas Philippon, who puts most of the blame on inadequate antitrust enforcement.
Philippon argues that US markets were more competitive than European markets two decades ago, but that policymakers defended competition more rigorously in Europe than America since then (thus the title "The Great Reversal"). As the book summary argues:
Sector after economic sector is more concentrated than it was 20 years ago, dominated by fewer and bigger players who lobby politicians aggressively to protect and expand their profit margins. Across the country, this drives up prices while driving down investment, productivity, growth, and wages, resulting in more inequality. Meanwhile, Europe ― long dismissed for competitive sclerosis and weak antitrust ― is beating America at its own game.
That's contradicted by the latest research, to be published in the Quarterly Review of Economics by economists David Autor, David Dorn, Larry Katz, Christina Patterson and John Van Reenan. They focus on why the share of labor compensation in national income has been declining, but their exhaustive empirical work winds up clarifying the causes behind the rise of superstar firms. (My Bloomberg Opinion colleague Noah Smith also explored this literature in a column last week, emphasizing the potential role of technology in creating and perpetuating superstar firms.)
Autor and his team find support for a productivity-based explanation of increased market concentration. As they note, "If globalization or technological changes push sales towards the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms." This more benign view is supported in several ways.
First, the economists found clear upward trends in various concentration measures, with a smaller number of firms accounting for a larger share of US industry sales. That's consistent with Philippon's research and with most other commentary on the topic, though there are some industrial-organization economists who agree with the general conclusion but quibble with the measures used to confirm it. Where Philippon and the Autor team diverge, though, is in the causes of those facts.
Second, the productivity-based view, but not the antitrust one, would predict that the industries concentrating fastest would be the ones with the fastest growth in productivity. The economists show that larger firms are more productive than smaller ones, that industries concentrating faster are ones with faster growth in patents, and that industries with bigger gains in labor productivity had larger increases in concentration. How can these observations be reconciled with the overall slowing of aggregate productivity growth? Either the effects aren't that large, or they have been offset by the growing productivity gap between leading firms and others in each sector.
Finally and most crucially, if rising concentration is caused by the benign productivity explanation as opposed to the more troubling lax-antitrust one, the patterns should be similar across the globe despite varying antitrust laws and enforcement. And that's precisely what the new research shows. As the economists note: "An alternative interpretation of these patterns is … that weakening US antitrust enforcement has led to an erosion of product-market competition. The broad similarity of the trends in concentration, markups and labor shares across many countries that we document below casts some doubt on the centrality of such US-specific institutional explanations. Indeed … antitrust enforcement has, if anything, strengthened in the European Union — and yet … industry concentration appears to have risen in the European Union despite this countervailing force."
A productivity-based explanation for rising industry concentration would suggest dramatically different policies than the antitrust one does. The evidence uncovered by Autor and his collaborators buttresses the view that superstar firms are thriving because they are simply more productive than other firms, not because they have been given a special break by regulators.