This paper – which can be found here – has been surrounded by a lot of publicity, and is a potentially important piece.
It begins with an observation that goes to the heart of the debate: ‘politicians are calling on antitrust to solve an array of problems associated with the excessive power of large corporations’. The author believes that ‘concerns about corporate power, and today’s renewed interest in antitrust, represent an opportunity to strengthen competition policy.’ At the same time, he alerts that the role of antitrust in promoting competition could well be undermined if antitrust is called upon or expected to address problems not directly relating to competition, such as the political power of corporations or income inequality. The ‘central purpose of this article is to assess the relevant economic evidence regarding competition (…) and then, based on that evidence and on antitrust learning and experience, identify ways to improve and strengthen antitrust.’
The paper is structured as follows:
Section 2 provides an overview of recent references to reduced competition in the mainstream media, politicians’ pronouncements, think-tank papers, and academic papers.
Section 3 looks at the economic evidence relating to increased economic concentration and corporate profits. He argues that assertions about increased market concentration fail to grapple with two challenges: (i) conceptually, it is extremely hard to identify markets (as any competition expert knows); (ii) in practice, data may not be available or be comparable (e.g. concentration may be measured across industries, or only nationally when markets are local). As a result, while large firms may have an increased role in the economy, this tells us little or nothing about whether concentration has been increasing in properly-defined relevant markets – or about whether market power is increasing in those markets.
Furthermore, where there is an observable increase in market concentration, the increases do not seem to be that significant: ‘For better or worse, I very much doubt that many antitrust economists would be concerned to learn that a market had experienced these types of increases’ in market concentration. Add to this that concerns about market concentration start from an assumption that an ‘increase in concentration indicates a decline in competition – even if the resulting level of the four-firm concentration index is only 30% or 40%, meaning that quite a few firms continue to compete. Such an assumption strikes me as unjustified, especially given the forces of globalization and technological change that have transformed many industries in recent decades’.
Ultimately, what matters is: (i) how does concentration relate to competition? and (ii) how was concentration achieved? The empirical literature seems to indicate that: ‘observed increases in concentration generally reflect the forces of competition at work in a manner that has enhanced productivity. Antitrust economists would normally expect this type of competition to benefits customers as well.’
Turning from market concentration to profits, he considers it to be undeniable that the share of corporate profits as a share of the GDP has increased significantly of late – and that higher profits are persistent at firm-level. While there may be various reasons for this, it ‘certainly appears that many large U.S. corporations are earning substantial incumbency rents, and have been doing so for at least 10 years, apart from during the depths of the Great Recession. High and persistent profits for any one firm are easy to explain, in theory, based on that firm being more efficient than its rivals. But if high and persistent profits are widespread, any economist will naturally ask why competitive forces are not eroding those supra-normal profits. This evidence leads quite naturally to the hypothesis that economies of scale are more important, in more markets, than they were 20 or 30 years ago.’ From this perspective, current incumbents are the survivors from a previous era of intense competition who now are able to benefit from these economies of scale – and to persistently earn supra-normal profits because they are protected by significant entry barriers.
This conclusion is reinforced by the very low rate at which new businesses are being created, the lowering of productivity growth rates – which may have to do with ‘a weakening of the process by which resources shift toward the more efficient firms within an industry’ – and stock valuations that point towards supra-competitive profits continuing to flow (or even increase) to companies in the future. As a result, Shapiro concludes that: ‘in markets where this state of affairs prevails, namely oligopolies protected by barriers to entry, antitrust has a critical role to play to control mergers and acquisitions involving large incumbent firms, and to prevent these firms from engaging in exclusionary conduct.’ (my emphasis)
Section 4 discusses in greater detail potential competition policy responses to the rising economic concentration and unprecedented corporate profits that were identified in the previous section. He suggests six different policy reactions:
- increasing cartel enforcement efforts – More concentrated markets are generally regarded as more susceptible to the harms caused by durable, effective cartels and by legal, interdependent conduct. Logically, then, to the extent that markets have become more concentrated over time, cartel enforcement becomes all the more vital.
- imposing tighter controls on mergers – Several types of economic evidence support moving toward stricter merger enforcement in the United States: evidence that U.S. markets have become more concentrated, evidence that price/cost margins have risen, evidence that entry barriers have become higher, and evidence that corporate profits have risen substantially and are expected to persist. Empirical studies and merger retrospectives also seem to indicate that mergers lead to mark-ups more often than they lead to efficiencies. As a result, the evidence ‘supports a shift to a moderately stricter merger enforcement policy’ (…) One promising way to tighten up on merger enforcement would be to apply tougher standards to mergers that may lessen competition in the future, even if they do not lessen competition right away. In the language of antitrust, these cases involve a loss of potential competition.’
- taking a tougher approach to exclusionary conduct by dominant firms – while this has been strongly (some would say vociferously) argued by some, the issue is that identifying exclusionary conduct is typically very fact-intensive. The author thinks this is still the correct approach.
- adopting policies that reduce entry barriers – this is not really about enforcement, but about policies that remove barriers to competition (e.g. the competition assessment of regulations and legal reform).
- actively breaking up large firms in concentrated markets – unsurprisingly, the author does not support this. First, antitrust is not supposed to address political power, which is the concern behind most calls to break up large firms. Furthermore, if the dominance of current corporates derives from efficiencies arising from economies of scale, breaking up companies will reduce consumer welfare by reducing corporate efficiency.
- regulating firms deemed to have substantial market power –the author considers that antitrust is not well suited to preventing the exploitation of monopoly power (some European experts might disagree). Nonetheless, and while price regulation is notoriously difficult to get right, he expects that ‘regulations relating to privacy, data ownership and portability, or open interfaces and interconnection may attract widespread support.’
Section 5 concludes that this is a time of opportunities – to reinforce competition following the empirical data – and of risks – of using antitrust to deal with problems for which antitrust in not well suited.
This is a very good paper – one that summarises much better than I ever could (see my posts of 15 and 22 September) a lot of the literature on the relationship between economic and political developments, on the one hand, and competition law on the other.
I have some doubts about the proposal that competition agencies should be stricter on mergers that may affect future competition – this raises legal issues regarding evidence and the standard of proof of future harm (which the author recognises). In effect, the success of this approach requires either the adoption of much more lenient evidentiary standards regarding the likelihood of harm , or an easing of evidentiary requirements to prove harm (which may well amount to the same thing). I would also favour a more rule-based approach to abuses than the author does, but this is my lawyerly softie-Euro heart bleeding for the difficulty of proving exclusionary conduct in the US. Lastly, I’m not really sure why we should presume that ex-ante regulation is always be preferable to ex-post intervention against exploitative practices, but this is a sensitive topic that is better dealt with in detail or not at all, so I’ll not discuss it any further here.