The growing economic wealth and power of big companies - from airlines to pharmaceuticals to high-tech companies - has raised concerns about too much concentration and market power in the hands of too few. In particular, in advanced economies, rising corporate market power has been blamed for low investment despite rising corporate profits, declining business dynamism, weak productivity, and a falling share of income paid to workers.
The rise of corporate giants has raised fresh questions about whether this trend might continue and, if so, whether some rethinking of policy is needed to maintain fair and strong competition in the digital age. However, corporate market power is hard to measure and common indicators such as market concentration or profit rates can be misleading.
Our Chart of the Week, based on an upcoming IMF working paper using data for publicly listed firms from 74 countries, shows that the issue is broad and goes beyond Big Tech. Specifically, the chart plots the average markups (the ratio of the price at which firms sell their output to the marginal cost of production of that output, which provides a measure of market power) across all firms for advanced and emerging and developing economies.
The chart unveils two clear facts. First, markups among advanced economies have significantly increased since the 1980s, by 43 percent on average, and this trend has accelerated during the present decade. Second, among emerging market and developing economies, the rise of markups is much more moderate, a 5 percent increase on average since 1990.
More in-depth analysis shows that the increase in markups in advanced economies is mostly driven by “superstar" firms that managed to increase their market power further, while markups in other firms have essentially been flat. Interestingly, this pattern is found in all broad economic sectors, not just in information and communication technology.
Should we be concerned about this rise in corporate market power in advanced economies? The short answer is yes, especially if this trend continues. Our paper finds that, starting from low levels, higher markups are initially associated with increasing investment and innovation, but this relationship becomes negative when market power becomes too strong. Further, the link between markups and investment and innovation is more strongly negative in industries featuring higher degrees of market concentration.
The paper also finds a negative association in firms between labor shares and markups, implying that the labor share of income declines in industries where market power rises. In other words, with higher market power, the share of firms’ revenue going to workers decreases, while the share of revenue going to profits increases.
What are the policy implications? These will depend on the factors behind this increase in global market power, which are still being debated. Possible culprits include the rise of intangible assets such as software, network effects (when a product’s value to the user increases as the number of users of the product grows), or weaker anti-trust enforcement. More research is needed to discriminate between them.
An upcoming conference, organized by the IMF, the World Bank, and the Organisation for Economic Co-operation and Development, will delve into corporate market power, competition policies, product market (de)regulation, and their macroeconomic effects.
Watch a video on “Digitalization and the New Gilded Age" during a seminar at the 2018 IMF-World Bank Spring Meetings.
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