While it is no secret that the US economy has changed in important ways since the beginning of the 21st century, one particularly noticeable shift has been a rise in industrial concentration, where smaller numbers of large companies are dominating their markets in terms of sales, profits and the number of people they employ.
The fact that a handful of giant corporations dominate the technology sector is widely accepted as the new normal. Yet concentration is not limited to the tech sector, but has also spread to a raft of other industries, including retail, media and healthcare.
Source: Barclays Research calculations using company-level Compustat data
What’s at the root of this change and what does it mean for the US economy, investors, industries and consumers?
Economists tend to interpret the symptoms of market concentration in one of two very different ways:
According to this view, companies have market power when they can manipulate the prices of their products and services, as well as those that they pay suppliers and employees. In this unfavourable interpretation of concentration, dominant companies can damage economic vigour and growth by raising consumer prices, holding down wages or barring competitors from entering the market.
An alternative interpretation sees concentration in a more benign light. According to this view, concentration is the side-effect of increased competition, which is forcing less efficient firms out of the market. In this heightened competitive environment, the economy should benefit, as companies need to be more innovative, productive and efficient.
These two views have very different implications for the economy, but they can be difficult to differentiate and are not necessarily mutually exclusive.
The blurred lines between market power and winner-take-all are particularly evident in two current consumer issues:
Recent well-publicised concerns about data privacy highlight the omnipresence of the largest companies in our lives. While mostly associated with technology firms, other sectors have also been affected by data privacy concerns, especially considering the limited options available to consumers in some markets and the substantial anecdotal evidence that dominant companies are using their market power to disadvantage competitors or suppliers.
At the same time, price transparency and competition emphasised by the “winner-take-all” argument appear to be on the increase in some sectors, where competitive dynamics seem to have intensified. This is obvious to anyone who shops online and runs contrary to traditional notions of how firms wield market power. In some sectors – such as ride sharing – firms have risen to prominence because they have disrupted the dominance of existing monopolies.
Untangling the market power and winner-take-all arguments is difficult, and investors, business leaders and regulators have struggled to find reliable measures to determine which one of these two trends is at play. To address this ambiguity, our analysts have assembled a comprehensive industry-level dataset for the US economy comprising 25 years of data on a range of factors. Set in the context of rising corporate profitability, they include:
Note: Labour’s share of overall business output has been trending down since the 1970s, but the pace accelerated around the year 2000.
Source: Barclays Research
The results of our analysis show that while all three started to decline around the year 2000, corporate profits continued to rise. Elements of both market power and winner-take-all are present, but the evidence more clearly points to market power as the dominant influence on concentration, with detrimental effects on the economy. Not every economist agrees, and in a related article we address three common critiques cited when discounting rising market power.
Since high concentration can be associated with both strong and weak competition, our analysts have constructed a new way to measure competitiveness: the Barclays Competitiveness Indicator (BCI).
The BCI was created using principle components analysis, a widely accepted statistical analysis approach that identifies a smaller number of uncorrelated variables from a larger set of data.
By exploring whether there are common factors explaining the joint evolution of investment, business dynamism and labour’s share of income, our new metric suggests that – in line with the market power argument – competitive pressures have been diminishing since the turn of the millennium.
Learn more about the BCI and see it applied to the retail and media sectors in our Impact Series report on market power (PDF, 2.4MB).
By reviewing persistent economic puzzles occuring in the US since the turn of the millenium through the lens of market power, we can better understand phenomena such as sluggish wage growth in the face of record-low unemployment and rising corporate profits despite macroeconomic challenges such as tariffs, trade wars and more.
As the effects of market power become even more apparent, policymakers may choose to introduce new rules and regulations to protect consumers and employees, as well as address issues of competitiveness. There are a number of ways this could be achieved, which we explore in Correcting for market power: Possible regulatory responses.
Regardless of how policymakers choose to respond, we believe they will in due course. Investors, company leaders and consumers should be prepared for these changes.
Authorised clients of Barclays Investment Bank can log in to Barclays Live to view the complete report, entitled The rise of market power: How an increasingly concentrated corporate America is influencing the US economy (26 March 2019).
Download the fifth report in the Impact Series from Barclays Research.
Intensifying market power could help explain two US economic trends: growing corporate profit margins and sluggish wage growth. How might regulators respond?