The US Economy Is Becoming More Concentrated. Why? Part 2

Three reasons why concentration might not be a bad thing

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Aug 26, 2019
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In the first part of this series, I discussed a report from U.K.-based investment bank Barclays on the root causes of the concentration that has taken place in corporate America over the last two decades. It identified two opposing theories -- market power, which states that big business will use its size to further squeeze out competition and ultimately harm consumers, and winner-take-all, which posits that concentration is a natural consequence of strong competition and should benefit the economy. Barclays concluded that market power is a better explanation for the state of the U.S. economy today. In the report, they also addressed three possible critiques of this stance.

Low inflation

The first criticism of this conclusion could be that inflation has stayed low. If powerful companies are abusing their positions in the market, then why aren’t prices rising? There are several explanations for this. First, there are other factors that affect prices that have nothing to do with a business's ability to raise them. The cost of goods and labor has decreased over the same period that concentration has increased due to production outsourcing to the developing world, which could explain the lack of price inflation.

Second, just because a firm has market power does not necessarily mean that it will use it to harm consumers. As I have noted in my series of articles on Amazon (AMZN, Financial)'s growing monopoly, regulators in the U.S. tend to be focused on instances where company action hurts consumers, for example through price gouging. They are often less concerned with anticompetitive business practices, which is one possible explanation for how Jeff Bezos has gotten away with selling products at below cost to capture market share. The consumer benefits (for now), so no harm is done (theoretically).

The most dominant firms are the most dynamic

The second criticism of Barclays position could be the observation that the biggest "offenders" in the market power conception are the most dynamic and innovative. How can Amazon, Google (GOOG, Financial) and Apple (AAPL, Financial) be bad for the wider economy if they consistently invest billions into research and development? To this, the report responds:

“If dominance by several large firms is depressing aggregate investment and technological innovation, then the magnitude of investment and innovation by those large firms is beside the point. Indeed, these dominant firms may be investing and innovating just enough to keep at bay prospective competitors that would otherwise enter, invest and innovate. To assess the broader consequences of market dominance, we must rely on larger industry trends, rather than outputs of individual companies.”

Demographics

Finally, there is an argument that since the U.S. population is aging, there will naturally be a decrease in the number of new businesses being started, and in aggregate innovation and change, as older workers are less likely to take risks, move cross-country, and so on. The reports response to this is that while this argument may explain how market concentration came about, it doesn’t address the fact that market concentration could be bad. If anything, policymakers should put in place legislation and regulatory frameworks that counteract this demographic shift.

In the third and final part of this series, I will focus on what increased market concentration can tell us about labor’s share of income, business dynamism and capital investment, and what these trends can tell us about the direction of the U.S. economy.

Disclosure: The author owns no stocks mentioned.

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Morgan Stanley: Disregard Strong Consumer DataÂ

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