Joshua Gans, Andrew Leigh, Martin C. Schmalz, Adam Triggs — How Market Power Worsens Income Inequality

Our study aims to help draw together two strands of literature. As the World Inequality Report recently showed, most advanced nations have seen an increase in inequality over the past generation. Meanwhile, a growing body of evidence points to an increase in market power, both in terms of rising market concentration and increasing markups. A burgeoning literature suggests that superstar firms are capturing increasingly high market shares, allowing them to use their market position to earn excess profits. Given the inequality in stock ownership, market power may continue to increase inequality in the future....

ProMarket
How Market Power Worsens Income Inequality

Joshua Gans, Andrew Leigh, Martin C. Schmalz, Adam Triggs

Mark Paul and Mark Stelzner — Rethinking collective action and U.S. labor laws in a monopsonist economy

Discussions today are pervasive among economists and policymakers about the increasing rise of firms’ market power and the potential negative effects of that power on the U.S. economy. Of particular concern is the rise of new technologies and the dominance of platform giants—such as Amazon.com Inc., Alphabet Inc.’s Google unit, Apple Inc., and Uber Technologies Inc., among others—which are not improving the U.S. socioeconomic landscape by reaping gains from potential economies of scale, but rather are throwing around their weight to suppress wages, raise prices on consumers, and enter the political arena to ensure the federal government allows the U.S. economy to continue on the path of market consolidation.

Many economists point to this disconcerting rise in market power as leading to a simultaneous rise in monopsony power—the ability of the firm to have an influence over the determination of workers’ wages—which may contribute to the persistence of stagnant wages despite relatively low headline unemployment numbers in recent times.

This is in stark contrast to decades of research and modeling in economics following the so-called marginalist revolution in the discipline, which resulted in most economists simply treating monopsony power as a special case only existing in the now long-gone company towns of Homestead, Pennsylvania, and Pullman, Illinois, of the 19th century or in highly concentrated island economies of introductory economics textbooks.4

Recent empirical investigations into U.S. labor markets no longer allow reasonable economists to bury their heads in the sand about market power and assume that workers’ wages are simply equal to the value of their marginal product or service. There’s now insurmountable evidence that monopsony power is prevalent throughout the U.S. economy, though the degree to which it may contribute to widening income inequality and underemployment remains an open question. These findings imply that employers can siphon off “rents”—economic parlance for excessive profits beyond the cost of production—from workers through the exercise of monopsony power. These findings are the complete opposite of the dynamic formulated in most current labor market models.

In our new Washington Center for Equitable Growth working paper, “Monopsony and Collective Action in an Institutional Context,” we seek to better understand the theoretical implications of this new and growing empirical literature on monopsony power and the resulting lower wages for workers

WCEG — The Equitablog
Rethinking collective action and U.S. labor laws in a monopsonist economy

Mark Paul, assistant professor of economics at New College of Florida and a fellow at the Roosevelt Institute, and Mark Stelzner, assistant professor of economics at Connecticut College

See also

Oxfam Blogs — From Poverty to Power
Book Review: New Power: How it’s Changing the 21st Century and Why you need to KnowDuncan Green, strategic adviser for Oxfam GB

Jonathan B. Baker — Market Power or Just Scale Economies?

In this post, which is based on my FTC testimony, I explain why growing market power provides a better explanation for higher price-cost margins and rising concentration in many industries, declining economic dynamism, and other contemporary US trends, than the most plausible benign alternative: increased scale economies and temporary returns to the first firms to adopt new information technologies (IT) in competitive markets.

The benign alternative has an initial plausibility because the efficient size of firms has likely grown over time in many industries. That is the natural consequence of the high fixed costs of investments in information technology, the growing importance of network effects, and an increased scope of geographic markets. Under such circumstances, firms could grow larger, concentration could rise, and price-cost margins could increase even if markets are competitive. In addition, the first firms to invest in new information technologies may earn substantial rents. The rents should be temporary if those investments don’t confer market power and rivals follow suit with investments of their own.

Yet six of the nine reasons I gave for thinking market power is substantial and widening in the US in my testimony cannot be reconciled with the benign alternative. I set forth evidence showing that anticompetitive coordination, mergers, and exclusion are underdeterred, that market power is durable, that increased equity ownership of rivals by financial investors softens competition, and that governmental restraints on competition have grown. As I explained in my testimony, none of the reasons is individually decisive: there are ways to question or push back against each. But their weaknesses are different, so, taken collectively, they paint a compelling picture of substantial and widening market power over the late 20th century and early 21st century....

The bottom line is that growing market power is a better explanation for declining dynamism, rising concentration and markups in many industries, and the other reasons for concern, taken as a whole, than the alternative of increasing scale economies and early-adopter rents in competitive markets. The benign alternative may be a partial explanation for some trends, but increasing market power is a key part of the story.

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
Market Power or Just Scale Economies?

Jonathan B. Baker | Research Professor of Law, American University Washington College of Law,  former chief economist at the FTC and the FCC,  and author of The Antitrust Paradigm: Restoring a Competitive Economy, forthcoming from Harvard University Press.

See also

WCEG — The Equitablog
Understanding the importance of monopsony power in the U.S. labor market
Kate Bahn

EPI — It’s not just monopoly and monopsony: How market power has affected American wages

Report.

Economic Policy Institute
It’s not just monopoly and monopsony: How market power has affected American wages
Josh Bivens, Lawrence Mishel, and John Schmitt

See also

From Poverty to Power
The World Bank’s flagship report this year is on the future of work – here’s what the draft says

Duncan Green, strategic adviser for Oxfam GB

Jacob A. Robbins — How the rise of market power in the United States may explain some macroeconomic puzzles

These new facts are particularly puzzling from the point of view of the standard neoclassical economic model, in which markets are perfectly competitive. In this view, profits should not persist over the long run, let alone enable the owners of corporations to increase their share of income over time. The standard model, however, cannot address many of the fundamental changes that have occurred in the U.S. economy over the past 40 years.

In order to explain these new trends, I and my co-authors make several modifications to the standard model, among them positing imperfect market competition, financial assets based on monopoly profits, and the possibility that the natural rate of interest can change. With these parsimonious modifications, our model can explain the data in ways the old model cannot.

Here’s how it works: 

WCEG
How the rise of market power in the United States may explain some macroeconomic puzzles
Jacob A. Robbins, Ph.D. candidate in economics at Brown University and a doctoral fellow at the Washington Center for Equitable Growth

See also

Kaldor and Piketty’s facts: The rise of monopoly power in the United States
Gauti Eggertsson, Jacob A. Robbins, Ella Getz Wold

David F. Ruccio — Global rentier capitalism

… as the authors of the new report from the United Nations Conference on Trade and Development have explained, there is a growing concern that

increasing market concentration in leading sectors of the global economy and the growing market and lobbying powers of dominant corporations are creating a new form of global rentier capitalism to the detriment of balanced and inclusive growth for the many.

And they’re not just talking about financial rentier incomes, which has been the focus of attention since the global meltdown provoked by Wall Street nine years ago. Their argument is that a defining feature of “hyperglobalization” is the proliferation of rent-seeking strategies, from technological innovations to mergers and acquisitions, within the non-financial corporate sector. The result is the growth of corporate rents or “surplus profits.”...

What happens when economists assume away asymmetry, especially of market power.

Occasional Links & Commentary
Global rentier capitalism
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

Asher Schechter — UN Study Warns: Growing Economic Concentration Leads to “Rentier Capitalism”

Earlier this year, a Stigler Center paper by Luigi Zingales [Faculty Director of the Stigler Center and one of the editors of this blog] argued that market concentration can lead to a vicious circle, in which companies use market power to gain political power that in turn allows them to gain more market power, and vice versa. Zingales called this the “Medici vicious circle”: “Money is used to gain political power and political power is then used to make more money.”

A new UN report shows that this vicious circle is now a prominent feature of the global economy. Thirty years of hyperglobalization, according to the report, have led to sharp increases in global market concentration and a proliferation of rentierism, whereby the world’s largest corporations attempt to protect their market power through a variety of rent-seeking activities, such as lobbying or systematic abuse of intellectual property laws. While many of these companies are headquartered in the United States, the “endemic rent-seeking that stems from market concentration, heightened corporate power, and regulatory capture” has spread much further, leading to the emergence of “global rentier capitalism.”...

Neoliberalism = rentier capitalism

UNCTAD’s research is among the first to assess the rise in market concentration on an international scale. It also attempts to measure the growth of rents—that is, the income that large companies derive solely from the ownership and control of assets, rather than from innovation.

In order to do that, UNCTAD built a database comprised of financial statements made by publicly traded non-financial companies in 56 developed and developing countries between 1995 and 2015. Measuring the size of corporate rents is difficult due to the scarcity of data and the wide variety of rent-seeking activities companies can engage in, but the UNCTAD research team tries to approximate their magnitude by estimating surplus profits within specific sectors. Using the median value of firms’ rate of return on assets (ROA), they estimate the median performance of firms within a given industry. The difference between this estimate and the actual profits firms made is the surplus profit....

Market power begets political power, which begets further market power....

Throughout history, Blankenburg notes, economists and political theorists, from Adam Smith to John Maynard Keynes, have raised concerns that capitalism has a tendency to be captured by rentiers. The UNCTAD report echoes these historical concerns. “Rentier capitalism means that there isn’t just a few annoying rentiers in some countries that a bit of government intervention can rein in or neutralize,” says Blankenburg. “It is becoming an endemic part of capitalism, a new normal—at least for powerful corporations.”
The authors offer several remedies to tackle the rise of market power, among them tougher antitrust enforcement, the revision of existing trade agreements (and avoidance of signing new ones), and labor market interventions that focus on reducing inequality. “A good start,” they write, “would be to recognize that both knowledge and competition are first and foremost global public goods, and that their manipulation for private profit should be effectively regulated.”

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
UN Study Warns: Growing Economic Concentration Leads to “Rentier Capitalism”

Asher Schechter

Noah Smith — Why Workers Are Losing to Capitalists

Back in April, I wrote about one of the most troubling mysteries in economics, the falling labor share. Less of the income the economy produces is going to people who work, and more is going to people who own things....

Mystery to morons conventional economists maybe.

Here, Noah, read this: Michal Kalecki, "Political Aspects of Full Employment" (Political Quarterly, 1943). It's even posted at Brad DeLong's site.

It's a feature of capitalism, or a bug, depending on which side one is on. The so-called labor market is rigged in favor of ownership (capital) under capitalism. Capitalism is the economic system that favors capital (ownership) and is naturally suited for oligarchy of the plutocratic sort.

No mystery at all for those not living in ivory towers.

Bloomberg View
Why Workers Are Losing to Capitalists

Noah Smith

Nick Bunker — Markups, macroeconomics, and the changing U.S. economy

The two authors [Jan De Loecker of Princeton University and Jan Eeckhout of University College London] find a large increase in the average markup from 1980 to 2014—specifically an increase by a factor of 3.65. In 1980, the average markup was 18 percent and by 2014, the average was 67 percent. But interestingly, the increase is concentrated at the top of the markup distribution: The firm at the 90th percentile in 2014 had a markup of about 160 percent, compared to a markup of 40 percent for the 90th percentile firm in 1980. The markup at the median didn’t change much at all. In order to tie these increased markups with rising market power, the economists show how increases in markups are associated with higher profit levels, higher dividend payments, and a higher average market value—all of which would correspond to more market power in the economy....

Asymmetry in market power is increasing. This implies that economic rent is increasing.

WCEG — The Equitablog
Markups, macroeconomics, and the changing U.S. economy
Nick Bunker

ProMarket — The Rise of Market Power and the Decline of Labor’s Share

The two standard explanations for why labor’s share of output has fallen by 10 percent over the past 30 years are globalization (American workers are losing out to their counterparts in places like China and India) and automation (American workers are losing out to robots). Last year, however, a highly-cited Stigler Center paper by Simcha Barkai offered another explanation: an increase in markups. The capital share of GDP, which includes what companies spend on equipment like robots, is also declining, he found. What has gone up, significantly, is the profit share, with profits rising more than sixfold: from 2.2 percent of GDP in 1984 to 15.7 percent in 2014. This, Barkai argued, is the result of higher markups, with the trend being more pronounced in industries that experienced large increases in concentration.

A new paper by Jan De Loecker (of KU Leuven and Princeton University) and Jan Eeckhout (of the Barcelona Graduate School of Economics UPF and University College London) echoes these results, arguing that the decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power....

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
The Rise of Market Power and the Decline of Labor’s Share
Asher Schechter

Brink Lindsey and Steven M. Teles — Worried About Concentration? Then Worry About Rent-Seeking

While concentration can lead to rent seeking, rent-seeking can also lead to concentration.

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
Worried About Concentration? Then Worry About Rent-Seeking
Brink Lindsey, vice president for research at the Cato Institute, and Steven M. Teles | associate professor of political science at Johns Hopkins University and a senior fellow at the Niskanen Center
ht Mark Thoma at Economist's View

Ariel Ezrachi and Maurice Stucke —

In a series of papers published in the last two years, Ezrachi and Stucke explored the world of big data and artificial intelligence and argued that network effects can raise barriers to entry, enabling big platforms to engage in behaviors such as collusion, tacit collusion, and price discrimination, to the detriment of consumers. Their recent book Virtual Competition (Harvard University Press, 2016) explores the changing nature of competition in the age of big data and algorithms.

In a brief interview with ProMarket, Ezrachi and Stucke shared some thoughts on market power and the digital economy.... 

ProMarket
“Our New Economy Enables the Winners to Capture Much More of the Welfare”

Ariel Ezrachi, Slaughter and May Professor of Competition Law, a Fellow of Pembroke College, Oxford, and Director of the University of Oxford Centre for Competition Law and Policy; and Maurice Stucke, a co-founder of the law firm the Konkurrenz Group and law professor at the University of Tennessee

Noah Smith — Monopolies Are Worse Than We Thought

But before we devise strategies to fight the tide of monopoly, we need a more complete diagnosis. Why is monopoly power increasing? The best minds in the econ profession are on the case, but there’s no definitive answer yet...

If "the best minds in the econ profession" are on the case, we'll never know the actual reasons.

Bloomberg View

Monopolies Are Worse Than We Thought

Noah Smith
ht Mark Thoma at Economist's View

David F. Ruccio — Markets, power, and the distribution of income

Joseph Stiglitz usefully explains that there’s more than one theory of the distribution of income. One theory, he writes, focuses on competitive markets (according to which “factors of production” receive their marginal contributions to production, the “just deserts” of capitalism); the other, on power (“including the ability to exercise monopoly control or, in labor markets, to assert authority over workers”).…

The only major problem with Stiglitz’s account is he leaves out a third possibility, an approach that combines a focus on market with power, that is, a class analysis of the distribution of income (which the late Stephen Resnick begins to explain in the lecture above).

According to this class or Marxian theory, markets are absolutely central to capitalism—on both the input side (e.g., when workers sell their labor power to capitalists) and the output side (when capitalists sell the finished goods to realize their value). But so is power: workers are forced to have the freedom to sell their labor to capitalists because it has no use-value for them; and capitalists, who have access to the money to purchase the labor power do so because they can productively consume it in order to appropriate the surplus-value the workers create.…

My only point is to point out there’s a third possibility in the debate over the distribution of income—a theory that combines markets and power and is focused on the role of class in making sense of the grotesque levels of inequality we’re seeing in the United States today.

And, of course, that third approach has policy implications very different from the others—not to force workers to increase their productivity in order to receive higher wages through the labor market or to hope that decreasing market concentration will make the distribution of income more equal, but instead to attack the problem at its source. That would mean changing both markets and power and, thus, eliminating class exploitation.

Occasional Links & Commentary
Markets, power, and the distribution of income
David F. Ruccio | Professor of Economics, University of Notre Dame

Mark Thoma — The Problem with Completely Free Markets

Some weekend reading.

Econ 101 — because some people need constant reminding of the difference between so-called free markets and genuinely competitive markets. 

Mark Thoma reminds that government institutions and supervision are required for competitive markets. Markets "free" of government "intrusion" are not likely to be competitive, and imperfect competition constitutes market failure, e.g., rent extraction based artificial market power.

The Fiscal Times | Opinion
The Problem with Completely Free Markets
Mark Thoma | Professor of Economics, University of Oregon

Joshua Gans — Another choice: The Intellectual Property Strategy

Over the past two weeks, I have been outlining broad strategic options for entrepreneurs of which a disruption strategy is just one choice. The concept is that a given entrepreneurial idea can be commercialised in many different ways. The key to entrepreneurial strategy is to identify the feasible set of choices available to start-ups and to write a business plan for each. After all, you can’t have a strategic choice without actually having a choice and I maintain that entrepreneurs often have many more choices than they think at the outside.

Thusfar, I have considered two options that have in common that they are focused on execution. Recall that being focused on execution means that a start-up embraces potential and on-going competition and formulates a plan to continually beat that competition by developing and continually re-investing in capabilities that allow the venture to beat the next wave of competition on quality, cost or some combination of the two. However, in choosing to focus on execution, a start-up can choose whether to be oriented towards competition (and building out a new value chain in competition with established firms) or to be oriented towards cooperation (and work within existing value chains). These two strategies were termed disruption and value chain respectively and each might be the appropriate one to be matched with an entrepreneurial idea.

Today I want to turn to strategies that are based on investing in control rather than execution. As I pointed out in a previous post, investing in control represents a somewhat familiar — or textbook — path to earning monopoly rents (or competitive advantage) as it involves undertaking a strategy that gives the entrepreneur control over key resources or assets that themselves allow the entrepreneur (or others) to create entry barriers. Thus, in contrast to focusing on execution, control involves more investment upfront but then, if successful, an easier competitive life later on as the venture can live off the future monopoly rents as it would an annuity because its customers would have fewer options to switch out to in the future.…

Digitopoly
Another choice: The Intellectual Property Strategy
Joshua Gans

(h/t Mark Thoma at Economist's View)

Peter Radford — Adam Smith – Socialist?

It is, apparently, not odd to attend classes in a business school and learn all about modern microeconomic theory. The lessons hammer away at efficiency and marginal pricing. They drill home the arguments about efficient markets, especially those that relate to capital. And they go on about the great laws of supply and demand that operate in the timeless vacuum of a market uncluttered by human frailties.

Then off go the students to be drilled into how to make those very frailties into weapons for profit. These other lessons are about how to impede the free market by rigging the game, and by building ‘barriers to entry’, by enforcing patents and copyrights, by eliminating competition, and by interfering in the labor markets to reduce wage bills.

What is learned in a business school education is almost exactly a negation of what is taught to economics students. Both sets of students are taught the wonders of market magic, but then the business school students are taught a myriad tricks to defeat that magic in order to produce long term profits and rents unsustainable under a true market magic regime. Only the economics students, cut off from reality as they are, continue on blissfully unaware that their magical world is being riddled with holes dug by their business school peers.

Peter Radford asks,

Should society be indifferent to profit levels but scandalized by higher wages? Does a rise in the minimum wage undermine employment the way the economists preach? If so, does not high profit?

Smith certainly seemed to know the answer. I will leave it to you to think about. I know what I think.

Real-World Economics Review Blog

Adam Smith – Socialist?
Peter Radford

Mark Thoma — 'Time to Get Real on Comcast-Time Warner'

In general, I don't think that we pay enough attention to the problems that are associated with market power.

Economist's View
'Time to Get Real on Comcast-Time Warner'
Mark Thoma | Professor of Economics, University of Oregon

Philip Pilkington — False Profit: How Paul Krugman’s Comments on Monopoly Distract From the Important Issues

So, what then is Krugman avoiding by positing what seems to be an emotionally appealing narrative? Simple: class power. Those two words neoclassical economists cannot stand to hear. The fact is that the idea of neoclassical competition is, at best, a relic of the 19th century, at worst, a fantasy pure and simple and income distribution has far more to do with class power than anything else. Class power is, of course, a political issue first and an economic issue second – one of the reasons that neoclassicals, who claim to practice “pure economics”, tend to avoid it. But it is class power that underlies the manner in which income is distributed today – especially when we are considering the role of finance.

Fixing the Economists
False Profit: How Paul Krugman’s Comments on Monopoly Distract From the Important Issues
Philip Pilkington

The plot (wrt rents) thickens. This single paragraphs sums it up.

For elaboration, see Michael Perelman, The Power of Economics vs. The Economics of Power (pdf) and C. Wright Mills, The Power Elite (pdf).

Robert Reich — Beware Capitalist Tools

Forbes Magazine likes to call itself a “capitalist tool,” and routinely offers tool-like justifications for whatever it is that profit-seeking corporations want to do. Recently it has deployed its small army of corporate defenders and apologists in the multi-billion dollar fight to keep the effective tax rates of global corporations low.

 

One of its contributors, Tim Worstall, recently took me to task for suggesting that a way for citizens to gain some countervailing power over large global corporations is for governments to threaten denial of market access unless corporations act responsibly.

He argues that the benefits to consumers of global corporations are so large that denial of market access would hurt citizens more than it would help them. The “value to U.S. consumers of Apple is they can buy Apple products,” Worstall writes. “Why would you want to punish U.S. consumers, by banning them from buying Apple products, just because Apple obeys the current tax laws?”



Wortstall thereby begs the central question. If global corporations obeyed all national laws — the spirit of the laws as well as the letter of them – and didn’t use their inordinate power to dictate the laws in the first place by otherwise threatening to take their jobs and investments elsewhere, there’d be no issue.

 

It’s the fact of their power to manipulate laws by playing nations off against one another – determining how much they pay in taxes, as well as how much they get in corporate welfare subsidies, how much regulation they’re subject to, and so on – that raises the question of how citizens can countermand this power.

Beware Capitalist Tools
Robert Reich | Chancellor’s Professor of Public Policy at the University of California at Berkeley and Secretary of Labor in the Clinton administration