Samir’s Selection 04/16/2017 (p.m.)

  • What has changed? The facts. The pendulum has swung heavily in favour of incumbent businesses. Their profits are abnormally high relative to GDP. Those that make a high return on capital can sustain their returns for longer, suggesting that less creative destruction is taking place. The number of new, tiny firms being born is at its lowest level since the 1970s.Two explanations are plausible. One is successive waves of mergers. When you split the economy into its 900 or so different industries, two-thirds have become more concentrated since the 1990s. Regulators may also have been captured by incumbent firms, which get cosy treatment. American companies collectively spend $3bn a year on lobbying. In regulated industries that don’t face competition from imports—health care, airlines and telecommunications—prices are at least 50% higher than in other rich countries, and returns on capital are high.The technology industry’s expansion could exacerbate the problem. An analysis by The Economist in 2016 suggested that about half the pool of abnormally high profits is being earned by tech firms. The big five platform companies—Alphabet, Amazon, Apple, Facebook and Microsoft—earned $93bn last year and have high market shares, for instance in search and advertising. They are innovative but sometimes behave badly. They have bought 519 firms, often embryonic rivals, in the past decade, and may stifle them. The data they gather can lock customers into their products. They may also allow firms to exert their market power “vertically” up and down the supply chain—think of Amazon using information on what consumers buy to dominate the logistics business. Investors’ sky-high valuations for the platform firms suggest they will, in aggregate, roughly triple in size…If the summit showed that there is a consensus that competition has weakened, there was little agreement on how to respond. Pessimists abound. Many antitrust technocrats plead that they have little power: bodies like the DoJ and the FTC are not meant to run the economy, but instead to enforce a body of law through courts that have become friendlier to incumbents. Some radicals argue that the government is now so rotten that America is condemned to perpetual oligarchy and inequality. Political support for more competition is worryingly hard to find. Donald Trump has a cabinet of tycoons and likes to be chummy with bosses. The Republicans have become the party of incumbent firms, not of free markets or consumers. Too many Democrats, meanwhile, don’t trust markets and want the state to smother them in red tape, which hurts new entrants.

    tags: competition economics cartel monopoly efficiency corruption politics Chicago regulation ideology 2017 inequality

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