German Gutierrez and Thomas Philippon study the evolution of superstar firms in the US over the past 60 years and find that this time is no different and the current super stars are not exceptional. Not only are they are not becoming larger and more productive, but their share of aggregate US productivity has fallen by a third since 2000.
As to an explanation for this,
We do not have a definite answer but it is clear that something changed around 2000. Perhaps ideas are becoming harder to find. Or perhaps declining competition and rising barriers to entry have allowed incumbents to cut investment and innovation. Or barriers to entry arise from excessively complex regulations. Indeed, we find that the free entry condition starts to break down around 2000. The elasticity of entry with respect to profits and/or Tobin’s Q has declined over the past 30 years and is now zero. We find rising barriers to entry from lobbying and regulations that seems to benefit large firms. Facing less competition, their incentives to invest and innovate decrease. The investment rate of large and profitable firms has remained surprisingly low as their payout rate (dividends and stock buybacks) has increased. This is presumably part of the explanation.
Ernest Liu, Atif Mian and Amir Sufi construct a model that shows reduction in long-term interest rates can increase business concentration. They write,
A reduction in long-term interest rates tends to make market structure less competitive within an industry. The reason is that while both the leader and follower within an industry increase their investment in response to a reduction in interest rates, the increase in investment is always stronger for the leader. As a result, the gap between the leader and follower increases as interest rates decline, making an industry less competitive and more concentrated. When interest rates are already low, this negative effect of lower interest rates on industry competition tends to lower growth and overwhelms the traditional positive effect of lower interest rates on growth. This produces a hump-shaped inverted-U production-side relationship between growth and interest rates... This paper introduces the possibility of low interest rates as the common global “factor” that drives the slowdown in productivity growth. The mechanism that the theory postulates delivers a number of important predictions that are supported by empirical evidence. A reduction in long term interest rates increases market concentration and market power in the model. A fall in the interest rate also makes industry leadership and monopoly power more persistent. There is empirical support for these predictions in the data, both in aggregate time series as well as in firm-level panel data sets.
The empirical evidence on firm operating surplus and market concentration ratio show that both increase with lower interest rates.
Finally, John Mauldin consolidates the evidence on business concentration and monopoly capitalism in the US,
In industry after industry, they can only purchase from local monopolies or oligopolies that can tacitly collude. The US now has many industries with only three or four competitors controlling entire markets... Here are other examples: Two corporations control 90 percent of the beer Americans drink. Five banks control about half of the nation’s banking assets. Many states have health insurance markets where the top two insurers have an 80 percent to 90 percent market share. For example, in Alabama one company, Blue Cross Blue Shield, has an 84 percent market share and in Hawaii it has 65 percent market share. When it comes to high-speed internet access, almost all markets are local monopolies; over 75 percent of households have no choice with only one provider. Four players control the entire US beef market and have carved up the country. After two mergers this year, three companies will control 70 percent of the world’s pesticide market and 80 percent of the US corn-seed market.
The list of industries with dominant players is endless. It gets even worse when you look at the world of technology. Laws are outdated to deal with the extreme winner-takes-all dynamics online. Google completely dominates internet searches with an almost 90 percent market share. Facebook has an almost 80 percent share of social networks. Both have a duopoly in advertising with no credible competition or regulation. Amazon is crushing retailers and faces conflicts of interest as both the dominant e-commerce seller and the leading online platform for third-party sellers. It can determine what products can and cannot sell on its platform, and it competes with any customer that encounters success. Apple’s iPhone and Google’s Android completely control the mobile app market in a duopoly, and they determine whether businesses can reach their customers and on what terms. Existing laws were not even written with digital platforms in mind.
And this is the critical point,
Broken markets create broken politics. Economic and political power is becoming concentrated in the hands of distant monopolists. The stronger companies become, the greater their stranglehold on regulators and legislators becomes via the political process. This is not the essence of capitalism.
It is surprising that faced with such overwhelming evidence the academics dispute over technical minutiae and the liberals look the other way or suggest token palliatives.
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