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Don’t Trust the Trusts: The Perils of Declining Market Competition

Editor’s Note: This article was written in March 2020, before the period of sudden change following the onset of the COVID-19 pandemic. It has been very lightly edited since then.

Competition has long been hailed as the hallmark of laissez-faire economics. Free markets centrally rely on competition to keep consumer costs low and to facilitate economic productivity and growth. But, in modern American capitalism, market competitiveness has slowed dramatically, fueling the emergence of highly concentrated, increasingly monopolistic industries. This competitive decline ultimately harms the majority of participants in today’s economy, save for the corporate giants that stand atop their industries. America must address its competition crisis both politically and institutionally if the ideal “free market” is to be truly restored.

Whether it be airline companies, hospitals, or breweries, American market concentration has reached unprecedented heights in the 21st century, representing a critical issue that predates—but has certainly been exacerbated by—the severe damage the COVID-19 pandemic has done to smaller businesses. In 2016, two-thirds of nearly 900 researched industries, including such consequential industries as finance and information technology, were found to have become more concentrated over the previous decade. For example, as electronic computing capabilities have advanced, industry concentration among computer manufacturing powerhouses, like Dell, has skyrocketed; the top four manufacturing firms shared close to 90 percent of all industry revenues that year. Two decades prior, the number was approximately 40 percent.

Several trends can explain why declining market competition is, indeed, a troubling phenomenon. Specifically, proliferating profit margins, paired with paltry capital investment among businesses and a notable lack of corporate dynamism as of late, signal that the excessive concentration of U.S. markets—while commercially lucrative for dominant firms—is economically dangerous for growth and the average American.

Soaring corporate profits owe heavily to markup spikes over time. Whereas the average markup in 1980 was just 21 percent above the good’s marginal cost of production, that figure has jumped to 61 percent today. In this span, average profit rates have risen from one percent to eight percent. This trend indicates that top firms’ market power has increased so markedly that leading companies can hike prices more than ever before, facing little resistance and pricing pressure from rival companies. The middle class, in particular, is left to shoulder much of the burden from this type of free-market failure. As New York University economist Thomas Philippon estimates, “[I]f you could return the market to the degree of competition we had 20 years ago, you would essentially increase the income of the median family by about $5,000 a year.” For example, the domestic costs of Internet accessibility have ballooned in the past two decades due to stagnant competition, now doubling international broadband pricing norms and hitting lower- and middle-class people the hardest. Likewise, in health care and transportation, the U.S. lags behind countries in Europe and elsewhere when it comes to market competitiveness.

Furthermore, the fact that firms have grown so profitable while not significantly investing in factors of production is telling. Especially since the onset of the Great Recession, private fixed investment—or corporate investment in physical assets that are used to produce goods and services—has not been commensurate with profit levels, which suggests that many firms have made substantial profits without prioritizing business investment and expansion. In analyzing this dip in investment despite high profitability, research has attributed 65 to 75 percent of the phenomenon to market concentration and governance, reinforcing the notion that shrinking competition and heightened market power are instrumental in firms’ decisions to curtail investment. This reduced investment frees up capital and boosts revenues for businesses, but because investment is such a key driver of economic growth, the trend has done no favors for the greater economy.

Additionally, business dynamism across the nonfarm private sector has steadily faltered over time. While new companies were created at a rate of 13 percent in 1981, the startup rate in 2014 had dropped to approximately eight percent, reflecting the tightened grip over industries that top firms enjoy at the expense of prospective, up-and-coming businesses. Accordingly, startup job opportunities have slowed over time, as young firms commanded upwards of 16 percent of the total employment share within the nonfarm private sector in 1981, compared to half of that in 2014. As businesses monopolize their respective industries, they also monopolize job prospects in these industries, tending to reduce overall wages as a result of waning competition over workers.

"Proliferating profit margins, paired with paltry capital investment among businesses and a notable lack of corporate dynamism as of late, signal that the excessive concentration of U.S. markets… is economically dangerous for growth and the average American."

Numerous factors have perpetuated these recent U.S. market struggles, the bulk of which have been found to be political in nature. Politically, in his book The Great Reversal, Philippon ascribes lowered market competition “to increasing barriers to entry and weak antitrust enforcement, sustained by heavy lobbying and campaign contributions.”

Consider the landmark AT&T-Time Warner merger, which was confirmed in 2019 after the Department of Justice’s unsuccessful attempts to block it on antitrust grounds. The merger epitomizes the growing pattern of vertical integration, as AT&T and Time Warner were not direct competitors at the time of the deal, but instead provided complementary services. Such vertical integration can be tactically anti-competitive, with this deal allowing the AT&T-Time Warner conglomerate to obtain “unparalleled market power over both content creation and distribution.” Through its acquisition, AT&T secured the ability to generate greatly enhanced revenue by favoring Time Warner’s content on its network, to the detriment of Time Warner’s media competitors.

As Philippon points out, and as the case of the AT&T-Time Warner merger attests, lobbying is crucial in sustaining select firms’ dominance in their industries. During the first quarter of 2018 alone, in the lead-up to the initial federal court ruling that allowed the merger to stand, AT&T devoted $4.1 million to lobbying efforts and enlisted the help of nine major lobbying and consulting firms to push for the merger’s approval. In the world of Big Tech, too, companies have stepped up their lobbying initiatives, particularly as antitrust complaints have intensified. Between 2010 and 2019, Google, Amazon, Facebook, and four others spent almost $500 million on lobbying to preserve their platform monopolies.

Unfortunately, U.S. antitrust enforcement has been overwhelmed throughout the past decade. Public-sector enforcement actions consist of criminal and civil actions on the part of the Department of Justice, as was the case in the AT&T-Time Warner suit, alongside civil actions on the part of the Federal Trade Commission (FTC). Together, these agencies are broadly tasked with promoting market competition in accordance with laws like the 1914 Clayton Act, which forbids mergers and acquisitions in which the end result “may be substantially to lessen competition, or to tend to create a monopoly.” Problematically, the Justice Department and FTC simply have not been able to keep up with these dealings. From 2010 to 2018, although merger filings went up almost 80 percent, the number of merger actions remained stable at roughly 40 per annum. Moreover, criminal antitrust and civil non-merger actions have dropped considerably. On top of the persistent lobbying campaigns that render many enforcement actions futile, a prime culprit of lacking enforcement in recent times is funding. While the Justice Department and FTC combined for $491 million worth of enforcement resources in 2001, funding in 2018 was only $471 million, demonstrating just how strained antitrust resources have become as today’s near-monopolies have flourished.

If lawmakers wish to reinvigorate the capitalistic competition that the U.S. prides itself on, they must take a long and serious look at the shortcomings of federal antitrust regulation and enforcement. Influential lobbyists and interest groups acting on behalf of large, monopolistic corporations are able to wield far too much monetary power over how antitrust violations are assessed and largely excused in the status quo, a problem that is compounded by the budgetary constraints of agencies designed to fight trusts. Until these political factors are tackled, the weakening competitiveness of markets—and the negative implications this bears for the American economy at large—will persist.

Photo: Image via Flickr (Norman Maddeaux)