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