Once upon a time, before powerful computers and all matter of advanced methods for decomposing residuals, empirical research in economics looked relatively simple.  For instance, one could dip into the Census of Manufactures, come up with a return on assets, regress it against the four-firm concentration ratio, and make an inference about the exercise of monopoly power.  The economic tricks have gotten better over the years, but as a research question, this one appears to have gone out of fashion about thirty years ago.

That means it's time for the question to be reopened.  Paul Krugman approves.
There are, then, good reasons to believe that reduced competition and increased monopoly power are very bad for the economy. But do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies, including one just released by the White House. For example, in many industries the combined market share of the top four firms, a traditional measure used in many antitrust studies, has gone up over time.

The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan.

For Reagan didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement.
That change in antitrust enforcement transcended ideology, something that makes doing political economy rather than engaging in partisan politics difficult.  In the same way that transportation deregulation and tight monetary policy began during the Carter presidency and the fruits came in in time to re-elect Ronald Reagan, a substitution of international trade for antitrust enforcement as a way of protecting consumers enjoyed the support of William Baxter, the deputy assistant general for antitrust in the Reagan years, as well as Lester Thurow, at the time a policy intellectual at MIT.  William G. Shepherd, then of the University of Michigan, published a paper arguing that about three-fourths of national income originated in "effectively competitive" industries by 1980; that improvement over about half of the income over the preceding twenty years reflecting antitrust enforcement and increased international competition.

It all made sense against the news: the Reagan administration settled both the International Business Machines and American Telephone monopolization cases, dropping the first as overtaken by events (of what possible use, let alone meaning, is a mainframe monopoly?) and negotiating an agreement by which the Bell operating companies, still regulated monopolies, stood separately from the long distance and telephone equipment divisions, which faced competition.  And Chrysler had just been bailed out by the taxpayers, with the legacy car companies and the integrated steel producers lobbying for greater trade protection.

We seem condemned, however, to return to the old set of policy and research questions, though.
The White House announcement was accompanied by a 17-page issue brief, prepared by the [Council of Economic Advisors] the agency that advises the President on economic policy, on the benefits of competition. The brief acknowledges that the American economy has become less competitive and more concentrated in recent decades, and suggests that robust enforcement of antitrust laws can serve to mitigate this problem.

The CEA lists a number of underlying reasons for the decrease in competition across the American economy, among them “efficiencies associated with scale, increases in merger and acquisition activity, firms’ crowding out existing or potential competitors either deliberately or through innovation, and regulatory barriers to entry such as occupational licensing that have reduced the entry of new firms into a variety of markets.” It also makes the case that consumers and workers would benefit from concerted government action to promote competition “in a variety of industries.”

The CEA relies on a large number of academic studies to argue that competition benefits consumers and workers, and that firms’ abuse of monopoly power may harm workers and consumers alike, by leading to overpricing, lower quality, and lower wages. “The presence of many firms in a market does not ensure competition. Under certain conditions, firms may be able to collude with each other to create and abuse market power, for example by agreeing to raise prices or by restricting output (thereby raising prices) to consumers or by restricting wage growth for workers,” the Council writes, noting that in the United States price-fixing is illegal and that the detection and prosecution of “collusive cartels” is and should be an important priority of antitrust agencies.
We used to be less worried about rising concentration globally, as the world market was large enough to support multiple firms, and the competitive interests of firms with different linguistic and cultural heritages likely precluded rational cooperation (if there are sufficiently few firms, they don't have to meet in a smoke-filled room or at Dirty Helen's to fix prices).  But now, the old worries are back, and when even the University of Chicago has to make do with a chart showing rising concentration of revenues, how long will it be before another concentration-and-profits regression lands in a journal?

No comments: