A significant body of empirical research has documented a structural increase in margins across a wide range of industries and countries. On average, firms enjoy appreciably greater pricing power today than used to be the case in prior decades. Research also showed that this increase in mark-ups coincided with a decline in the labour share of output, higher aggregate concentration, larger corporate profitability, and a slump in business dynamism (as measured by indicators such as entry, investment and innovation). Some researchers have attributed recent margin trends primarily to the growth of so-called “superstar firms”—highly profitable companies that have successfully seized the opportunities generated by globalization and technological change (such as digitization and automation). Others have linked increasing mark-ups to a lack of competition, e.g. overly permissive merger control.

This article, available here, explores the implications of increased pricing power for merger control. It is structured as follows:

Section 2 discusses the implications of increased pricing power for the assessment of potential competition (i.e., competition “for the market”).

The main argument is that, in a world of highly successful incumbents, safeguarding market contestability and the potential for entry is essential to protect a functioning competitive process. In effect, one of the most striking findings of recent empirical research is that the observed upward trend in mark-ups is predominantly driven by a relatively small number of successful firms at the upper end of the profitability distribution. Interestingly, the phenomenon of superstar firms is by no means limited to technology markets but spans a wide spectrum of industries across developed economies, including sectors as diverse as manufacturing, mining and utilities. The success of these companies is an accomplishment, and in most cases, it has brought considerable benefits to consumers.

Even so, “winner take most” dynamics rarely bring about only positives. In particular, economic theory predicts that increasing scale economies and sunk costs will tend to magnify barriers to entry. Over time, this may lead to decreased levels of entry, lower aggregate investments, and increased concentration and incumbency rents. These predictions of economic theory are at least consistent with empirical work which found considerable decreases in business dynamism and entry, while the margins of the most successful firms continued to soar.

A key implication is that it becomes increasingly important for antitrust authorities to safeguard the possibility of competitive challenge via potential competition. Importantly, the concept of “potential competition” not only encompasses the possibility of small start-ups trying to replace large incumbents through disruptive innovations. Established companies operating in neighbouring markets may equally pose a significant threat of potential competition. It is therefore often preferable for a potential entrant first to establish a solid base in a neighbouring market, which allows building scale and network effects before daring to encroach on core fields of activity of the dominant rival.

A practical complication in the endeavour to scrutinise potential competition cases is that merger thresholds are typically revenue-based, and since potential competition cases revolve around future commercial activities, using past revenues as the sole benchmark implies that many important cases will fly under the radar. Assuming a merger is reviewed, a second difficulty concerns the applicable legal standard. In the EU, the standard of evidence is the balance of probabilities. Under a strict interpretation, the only thing that matters under this standard is the likelihood of harm, and not its magnitude. In potential competition cases, this is bound to lead to substantial under-enforcement. Since the social costs of monopolisation in these types of cases can be orders of magnitude larger than the social costs of type II errors in most actual competition cases (where concentration levels tend to be substantially lower), one must not only consider the likelihood of harm, but also its magnitude on order to accurately weigh the risks of under- and over-enforcement and maximize consumer welfare.

Section 3 discusses the implications of increased margins for the assessment of actual competition (i.e., competition “in the market”).

This section argues that merger enforcement should be particularly vigilant in a world of high mark-ups, since margin increases imply that otherwise comparable mergers are more likely to be problematic. High margins reflect a larger degree of pre-merger pricing power. The less effective competition is before a transaction, however, the less likely further concentration is going to be desirable for the competitive process. Further, higher margins are also likely to exacerbate the change in market power caused by horizontal concentrations. The higher the margins a merging partner earns, the more damaging is the cannibalisation of its sales that is caused by competition. Higher margins therefore tend to soften the merged entity’s incentives to compete, in order to avoid such cannibalisation post-transaction.

The rest of the paper is devoted to a controversy between these authors and Werden and Froeb. The latter authors point out that besides the direct, price-increasing effect of higher margins, there can also be an indirect, price-reducing effect. Specifically, this is the case when higher margins reflect reduced substitutability of the merging products (rather than, say, a decrease in the market’s elasticity of demand). Such reduced substitutability would make mergers comparatively less harmful, since the merging parties would then be less close competitors. The dispute is mainly about the suitability of the base parameter of their models, and I am not going to review the debate here. The authors of this paper ultimately dismiss the criticism with the argument that, even in the rare cases where higher margins can imply lower merger effects, this is usually hardly good news for consumers (let alone grounds for permissive merger control) – since the price-reducing effect of decreased substitutability can only be significant when margins are sufficiently close to the monopoly level in the relevant antitrust market. In other words, Werden and Froeb’s argument for “pro-competitive” margin increases effectively relies on the fact that, when prices are close enough to monopoly, further increases in margins will not aggravate merger effects anymore, because there is not sufficient competition left to restrict. Since competition in the market is already strongly derailed and competitive switching has become more and more difficult, one should usually be more, not less, cautious about permitting further concentration.


The tabloid approach to this paper would be to see a controversy between European and US officials (and academics) on how to react to higher profit margins. That would be facile. Instead, it is better to focus on how this paper presents a cogent argument for stricter merger control. I particularly enjoyed the distinction between competition for and in the market, since I happen to be thinking about whether (and how) potential competition may require a different treatment from actual competition when the risks of harm are high.

How to determine whether such harms are likely in individual cases, however, is a much more challenging proposition – particularly since mergers leading to potential harms can also lead to potential efficiencies, which will be equally difficult to prove and should benefit from similar evidential standards as those applicable to not-very-likely anticompetitive effects. Equally difficult would be to distinguish between high-margin and low-margin companies, or to come up with rules that would ensure that mergers involving such companies would be treated differently from other mergers – assuming that such an option would even be legally possible, let alone desirable.

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