Corporate America is becoming more concentrated. Is market power to blame?
26 Mar 2019
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.
US industries have become more concentrated, on balance
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?
Two ways to interpret concentration
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.
But the lines are blurred
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.
Our verdict: Market power is dominant
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:
business dynamism (the rate at which companies are formed, employee churn and geographic mobility, number of stock market flotations)
labour’s share of income
capital growth and investment
Important changes in the US economy are linked to rising concentration
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.
And competitiveness is waning
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.
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).
Intensifying market power could help explain two US economic trends: growing corporate profit margins and sluggish wage growth. How might regulators respond?
About the authors
Jeff Meli is Head of Research within the Investment Bank at Barclays. Jeff joined Barclays in 2005 as Head of US Credit Strategy Research. He later became Head of Credit Research. He was most recently Co-Head of FICC Research and Co-Head of Research before being named Head of Research globally. Previously, he worked at Deutsche Bank and J.P. Morgan, with a focus on structured credit. Jeff has a PhD in Finance from the University of Chicago and an AB in Mathematics from Princeton.
Jonathan Millar is Senior US Economist at Barclays in New York. He has expertise in monetary policy, productivity, business investment and the industrial sector. Prior to joining Barclays, Jonathan was a Principal Economist at the Board of Governors of the Federal Reserve in Washington, DC. He also spent two years in Paris as an economist with the Organisation for Economic Development. Prior to these roles, Jonathan taught economics at the University of Michigan and had positions at the Bank of Canada, at the IMF, and as a specialist in energy derivatives at DTE Energy Trading.
Adam Kelleher is Head of Research Data Science at Barclays, based in New York. He is responsible for developing alternative data capabilities for research. Adam joined Barclays from BuzzFeed in May 2018. His previous work focused on large-scale machine learning for content recommendation and observational causal inference to guide data analytics.
He was recognised as one of FastCompany’s “Most Creative People” for his work on the POUND project and was an early advocate of causal inference in data science, which he now teaches at Columbia University’s Data Science Institute. He received his PhD in theoretical physics from The University of North Carolina at Chapel Hill in 2013.