Most researchers assume that the share of total output lost by labor went to the owners of capital. However, a new working paper shows that the capital share has also declined, while the profit share has gone up. Could this be related to an increase in firms’ market power?Profit = surplus value = economic rent. Economic rent arises from market power.
My hypothesis is that markups have increased because firms became better at creating product differentiation and erecting barriers to entry. In 1980 Michael Porter wrote Competitive Strategy, the ninth most influential book of the 20th century according to the Academy of Management. In this book, Porter explained how firms can create barriers to entry and obstacles to competition to increase their pricing power. The book became the primary textbook of all of the strategy courses taught in business schools and the gospel of the leading consulting firms. It captured also Warren Buffet’s investment rule. As he famously stated: “In business, I look for economic castles protected by unbreachable ‘moats’.” Should we then be surprised if firms finally learned how to apply it?The standard (neoclassical) economic model is based on no asymmetry including perfect competition.
If this were the case, Barkai’s model clearly shows that the outcome is inefficient: economic output and welfare could be greater if there were more competition. But how to promote it? The traditional antitrust method, which looks predominantly at mergers and market shares, could be insufficient. If Barkai’s conclusions prove to be robust, we may need to start thinking about new policies to promote competition.
The entrepreneurial and market share business models are based on monopoly power.
ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
Who Is Responsible for a Declining Labor Share of Output?
Luigi Zingales —Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance, and Charles M. Harper Faculty Fellow