- There is a debate over whether the United States has a monopoly problem. A monopoly is
- The economist Joseph Stiglitz says that increased market concentration across several sectors has reduced competition and slowed economic growth.
- The US government has countered by saying data is being misrepresented and that giant companies today are not harming consumers.
- At a recent FTC hearing, Stiglitz called for an update of antitrust laws.
- This article is part of Business Insider’s ongoing series on Better Capitalism.
There are plenty of companies that may feel too big to you, whether it’s trillion-dollar monoliths Apple and Amazon, or even the cable company you’re forced to deal with every day.
But the question of whether they have got so much power that they’re harming the economy is the subject of a debate in the spotlight once again.
For Nobel Prize-winning economist Joseph Stiglitz of Columbia University, there is indeed a monopoly and monopsony problem in the United States, and it’s high time to address it with new antitrust laws.
At a recent Federal Trade Commission hearing on the subject, Stiglitz said, “The point is, if our standard competitive analysis tools don’t show that there is a problem, it suggests something may be wrong with the tools themselves.”
The bedrock of America’s antitrust law was primarily built in the late 19th and early 20th century, during the democratic and reform-minded Progressive Era that followed the Gilded Age’s reign of robber barons and progression of inequality.
Even Adam Smith, the father of capitalism himself, warned in “The Wealth of Nations” against the consolidation of market power in the hands of a few. This is represented on the selling side by monopoly and on the buying side by monopsony, a term coined in the 20th century that refers to firms using their size to push down suppliers’ prices (Walmart is arguably an example).
Years of economic research has found that when market power is highly concentrated, barriers to entry prevent new competitors from building businesses, consumers have fewer options, and employees receive lower wages. This in turn slows overall economic growth.
Even before data on market power was routinely gathered, the federal government established the definition for an illegal monopoly and an illegal merger with the Sherman Act of 1890 and the Clayton Act of 1914. It also created the FTC in 1914 to enforce these rules.
Antitrust policy gradually evolved, and in 1982, the Herfindahl-Hirschman Index was adopted to mathematically measure the concentration of a market, clarifying whether it was competitive or not. The HHI, which is defined as the sum of the squares of each firm’s market share in a given market, concisely measures how monopolistic that market is.
According to FTC and Department of Justice guidelines, mergers and acquisitions that would dramatically increase the HHI in a particular market could come under further scrutiny about whether they would cause unfair market concentration. The Obama administration loosened those guidelines in 2010 in the wake of the financial crisis, allowing more freedom for mergers.
Is there a problem?
Last year, Rice University’s Gustavo Grullon, York University’s Yelena Larkin, and Cornell Tech’s Roni Michaely published a paper that used Census data to back up their finding that, “More than 75% of US industries have experienced an increase in concentration levels over the last two decades,” and that this has decreased competition.
One measure provided by the Census Bureau investigated by Grullon and his team – the market share of the four largest firms in a particular industry – suggests varying levels of concentration across industries:
The FTC and Department of Justice responded this May by saying this paper and others like it were simply incorrect. It wrote:
“At no level is the Census data capable of demonstrating increasing concentration of ‘relevant markets’ in the antitrust sense, i.e., ranges of economic activity in which competitive processes determine price and quality, and in which the impact of agreements, mergers, and unilateral conduct are evaluated in competition law.”
That is, the federal government is arguing that antitrust law has never been applicable to a massive, broad industry like “pharmaceuticals,” but rather applies to markets for specific, competing products. The government also argued that even if there has been increased market concentration, it’s not necessarily a bad thing. “First, when success and failure are random events, markets become concentrated over time,” the government argued. “Second, when success and failure are driven by relative degrees of innovation and efficiency, markets also become more concentrated.”
The Roosevelt Institute, an economic think tank that works with Stiglitz, felt compelled to respond. Marshall Steinbaum and Adil Abdela wrote that differentiating between industries and antitrust markets is valid, but that it is inaccurate to dismiss industry concentration as irrelevant. They also were able to compile a long list of specific antitrust markets that have been further concentrated over the last 20 years, even though there is indeed less data for such markets than for entire industries.
“If the federal antitrust enforcement agencies do not make significant changes to the enforcement of antitrust policy, first by acknowledging that many markets are highly concentrated, fewer and fewer firms will continue to expand their dominance,” the authors wrote, adding that the first step has to be the government taking the data seriously.
Time for a change
Stiglitz asked the government to take this data seriously at the FTC hearing in September.
He argued that this increase in market concentration has risen simultaneously with growing inequality in the US since the 1970s, when the policies of free market economists perhaps best exemplified by the Chicago School of Economics began to take hold.
He argued that the FTC needs to rethink what types of mergers it allows, break up companies that are eliminating competition and innovation and abusing their control over employees, and increase transparency of contracts with customers.
It will be a necessary step to kickstarting relatively slow GDP growth over the last 20 years.
“Innovation isn’t showing up in GDP, but it is in market power,” Stiglitz said about the companies he deemed to have gotten too big, smiling.
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