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We need to bolster antitrust enforcement

We need to bolster antitrust enforcement

Form a historical standpoint, there is no gainsaying the fact that the United States has been a salient promoter of antitrust laws and institutions. Beginning with the Sherman Act in 1890 and then ending in 1914 with the Clayton and the Federal Trade Commission (FTC) Acts, the US systematically sought to promote and protect competition. As a result, for over a hundred years, US antitrust laws, institutions, and enforcement have been the envy of the world.

Amitrajeet A. Batabyal
Amitrajeet A. Batabyal

That said, recent research by several economists, including but not limited to, Naomi Lamoreaux, Preston McAfee, and Carl Shapiro now suggests that the objective of social welfare is now looked upon differently and that the antitrust environment more generally is nowhere near what it once used to be. Does this mean that we now ought to take steps to strengthen antitrust enforcement? To answer this question, let us first look at four key research findings that tell us a lot about the nature of competition and market power in the US today.

First, there is incontrovertible evidence that the profits of corporations have risen significantly in the last few decades. In particular, the share of US gross domestic product (GDP) that is attributable to corporate profits has grown from 7.5 percent in 1985 to over 11 percent in 2016. Looked at differently, one can also say that the concept of “excess profit” which refers to the return to capital that is above the level required to draw in investors has gone up greatly and the risk-free return to capital has declined.

Second, evidence clearly shows that larger and more efficient firms have been growing at the expense of their smaller and less efficient competitors. As a result, a number of measures of industry concentration in the US have increased substantially over time. In this regard, the MIT economist David Autor and his colleagues have argued that market conditions and technology, either singly or jointly, have led to a rising concentration of sales by firms with superior products or higher productivity. These are the so called “superstar firms” such as Amazon, Apple, Facebook, and Google.

Third, economists routinely look at “price-cost ratios” to gauge market power in an industry and a higher ratio is indicative of increased industry concentration. Research shows that one such ratio for publicly traded firms in the US rose from 1.21 in 1980 to 1.61 in 2016. A second such ratio was shown by Robert Hall to have increased from 1.12 in 1988 to 1.39 in 2015.

Fourth and in some sense the most troubling is the fact that labor’s share of GDP in the US has been steadily declining since the 1980s. This fact logically leads us to ask whether firms as employers now are able to drive down wages and thereby worsen inequality, not only because they have increased market power in labor markets but also because present-day unions are significantly diminished entities.

The above four findings collectively paint a saturnine picture of competition and market power in the US today. I believe that these findings also constitute a clarion call for bolstering antitrust enforcement by the US Department of Justice (DOJ) and the FTC. Existing research by economists suggests three clear lines of action.

One such action involves looking at mergers very carefully and, when necessary, blocking horizontal mergers. A horizontal merger occurs when two or more firms offering similar, or compatible, products or services in the same market combine under single ownership. An example would be a merger between AT&T and Verizon in the cell phone provision market. A second line of action would be to vigorously examine exclusionary conduct by large and dominant firms and to preclude such conduct when such conduct would diminish social welfare. One kind of exclusionary conduct is an exclusive dealing agreement in which firm A promises to deal exclusively with firm B and, hence, to not deal with the competitors of firm B. A third and final line of action involves looking vigilantly at the market power of firms when such firms are large employers in labor markets and thus able to influence wages.

To clearly see the practical relevance of these actions, think of internet service. In many places, broadband service is, in effect, monopolized. Now, following the economist Preston McAfee, if we think of broadband as a utility—like electricity—then it is easy to see that in today’s world, it is really not possible to be an informed voter, shop online, and pay bills without adequate internet service. Antitrust enforcement is necessary to ensure that internet service providers do not put consumers on the back burner and think only about their own interests.

Batabyal is the Arthur J. Gosnell professor of economics at the Rochester Institute of Technology but these views are his own.