全球智库信息集成服务系统

This report contains a correction.

See also: “Fact Sheet: Toward a Robust Competition Policy” by Marc Jarsulic, Ethan Gurwitz, and Andrew Schwartz

The share of corporations earning profits above competitive levels has risen since the late 1970s. Large firms in many sectors—especially in communication services, health care, and information technology (IT)—now have market power that allows them to maintain prices above competitive levels.

This has important implications for the U.S. economy, which is largely governed through market competition. When firms are earning economic rents—returns to capital beyond what a competitive market would normally allow—income is redistributed upward to owners. The economic rents that flow to these owners function like a tax on everyone else, lowering real wages and shifting overall income shares away from workers.

Moreover, because firms earn rent when entry by competitors is inhibited, the economy becomes less dynamically efficient. When there are no entry barriers, high rates of profit attract new firms, increasing supply and eventually reducing price. When barriers exist, investment capital does not flow to its most profitable use, and potential gains in productivity can be squandered.

This report identifies several factors, apart from the development of technical superiority, that are creating entry barriers. These include the ability of firms to merge and increase market concentration; the increased importance of intellectual property rights; the development of businesses where network externalities are significant; and differential access to big sets of data on consumers.

This report also recommends a range of policy changes that can reduce these barriers to entry and support increased competition among firms. These policies include changes to antitrust policy and enforcement; changes to the rules thcat govern intellectual property; and measures to increase access to important types of data.

Recognizing that the implementation of some or all of these policies may provide incomplete solutions to competition problems, the authors also explain how a monopoly tax, levied on companies that earn profits in uncompetitive markets, could reduce the incentive to create market power and limit the revenues that can be used to sustain existing entry barriers.

Although there are many sources of competitive distortions, and any action taken to address them will require careful consideration, there is little doubt that changes to competition policy are in order and can substantially improve the operation of the U.S. economy.

Overview

• Entry barriers are raising many U.S. corporations’ profits.
  Market economies rely on the entry of new firms to ensure competitive results. When profits in an industry are relatively high and markets are functioning effectively, new firms have an incentive to enter in order to capture some of those profits. This, in turn, increases supply, lowers prices, and reduces the rate of return.
  
  Under competitive conditions, in which investment flows to the economic activity with the highest rate of return, the expectation is that rates of profit on invested capital will converge across firms and industries to a common, equilibrium value.
  
  When there are barriers to entry—that is, when something prevents new firms from increasing supply in an industry where profits are high—this process is frustrated. Incumbent firms protected by entry barriers benefit from higher-than-normal profits, but these gains come at the expense of their customers. In addition, incumbent firms have a reduced incentive to innovate and have a strong incentive to defend their market power. Thus, some of the long-term benefits of competitive markets are lost.
  
  There is now strong evidence that barriers to entry have a significant effect on many sectors of the U.S. economy. Measures to evaluate firm-level economic performance indicate that many firms have market power and are earning profits above competitive levels. For a significant number of firms, the ratio of a firm’s market value to the replacement cost of its capital has risen to well above 1. This indicates that firms are able to extract economic rent, meaning that they are able to net incomes exceed competitive levels. (see text box on Tobin’s Q below) The share of large firms earning rents has risen since the late 1970s, along with the share of rents in total corporate profits. This could not happen without the existence of powerful entry barriers.

• Several factors have created entry barriers.
  Although some of the barriers to entry are the result of production techniques or organizational structures that cannot be replicated across firms, there are other important causes. Among them is ineffective antitrust enforcement, which has allowed concentration to rise through mergers and acquisitions. Evidence shows that increases in concentration are often accompanied by increased prices. Moreover, incumbent firms with market power have been allowed to use acquisitions to fend off potential competition.
  
  Rules protecting intellectual property also create obvious entry barriers and play an important role in sectors such as communication services, pharmaceuticals, and IT.
  
  Network externalities, which are increasingly important in software and IT-based business, also create barriers. They exist when the benefits that an individual derives from a good increase when others decide to use it, creating additional incentive for others to buy the good. Telephones, word processors, and social media platforms produce these externalities, as increased usage results in a positive feedback loop. When network effects are significant, individual users will be reluctant to switch to a competitor, even if it is superior. This creates a lock-in effect and a barrier to entry for new firms.
  
  Differential access to big data on consumer behavior also appears to play an important role in reducing entry and competition. Data are crucial and valuable inputs to many digital businesses, many of which are constantly updating information based on the behaviors and interests of their users. Because these data are generated in part by the free or subsidized services that these firms provide to users, potential entrants are at a significant disadvantage. These entrants are less likely to become competitors if they lack crucial inputs for machine learning and the development of artificial intelligence (AI), which have become increasingly important to digital business.

• Changes in policy can reduce barriers to entry.
  Changes to antitrust policy and enforcement
  Rising market power is in part attributable to a decline in effective antitrust enforcement. Beginning in the 1980s, when the indicators of increased market power first emerged, antitrust regulators permitted many mergers, which has led to increased market concentration and price increases.
  
  Antitrust agencies also appear to have missed the effects of allowing top firms to acquire potential competitors that could erode their dominance. Many of these dominant firms already benefit from entry barriers.
  
  This report proposes a prohibition on mergers and acquisitions by firms already protected by entry barriers, as well as limits on operations by these firms in adjacent markets.
  
  Changes to intellectual property protection
  Because public investment in basic research is often the basis for patent-protected intellectual property, this report identifies a variety of potential measures to reduce the barriers created by patent rules. These include granting government entities the so-called golden shares, or decisive voting power, for products made possible by public investment; requiring licensing of patents with a public component; and introducing prizes to support innovation not accompanied by patent protection.
  
  Open data standards where data are competitively significant
  Building on a Consumer Financial Protection Bureau (CFPB) guideline that suggested banks share financial information with other institutions when their customers requested that they do so, the authors of this report propose similar rules: open data standards and data portability to allow users of digital platforms to switch easily when they wish. Additionally, the government should facilitate open data clearinghouses—analogous to weather data, which government sources provide to the public—to house publicly collected data that could be used in data-intensive areas such as AI. The report also advocates for a requirement that users be allowed to communicate across social media platforms, in much the same way that telephone subscribers can reach parties who are served by different telephone companies.

• When barriers remain, a monopoly tax can help level the competitive playing field.
  Because it may not be possible to reduce barriers for all firms and across all industries—and because changes in fundamental policies, such as antitrust and intellectual property rules, may be difficult and time-consuming to implement—the report also proposes a monopoly tax to reduce the flow of rents to large firms.
  
  Instituting a monopoly tax would have three effects. While such a tax would not directly aid new firm entry, it would reduce the flow of economic rents, making these revenues available for public purposes without harming efficiency. It would also discourage further efforts to enhance market power through actions such as mergers and acquisitions. Moreover, a monopoly tax would diminish the ability of firms with market power to use their outsize returns to influence political and regulatory outcomes.

There is now significant evidence that the competitive environment in the U.S. economy has changed dramatically since the late 1970s, with a significant share of corporations earning returns that exceed competitive levels.

Under competitive conditions—in which capital owners with funds to invest maximize their profits, and there are no barriers that prevent these funds from flowing to the projects with the highest rates of return—it is expected that rates of profit on invested capital will converge across firms and industries to a common, equilibrium value. The logic behind this expectation is simple: Supranormal rates of return in any line of business create the incentive for their own elimination, since profit-maximizing investors will have extra incentive to enter that business, replicate the productive process used by incumbent firms, and earn some of the higher profits for themselves. Entry should continue until the effects of increasing supply reduce prices and eliminate rents—that is to say, the difference between competitive and supranormal profits.¹

There is now evidence that in the aggregate, the share of rents in corporate income is positive and has trended upward since the late 1970s. To visualize this, consider the ratio of the equity market value of corporations to the replacement cost of the physical and intangible capital stock that they employ. This ratio, called Tobin’s Q, should be equal to 1 under competitive market conditions. However, Q values for many nonfinancial corporations have been trending upward since the late 1970s and are now significantly greater than 1. Using firm-level data from a large sample of publicly traded U.S. corporations for the period 1975–2015—excluding regulated utilities, financial firms, public service firms, and some others—economists Ryan H. Peters and Lucian A. Taylor construct measures of firm-level Q values. These measures include the replacement costs of both tangible and intangible capital.³ The average and 90th percentile values of the Peters-Taylor Q ratios are presented graphically in Figure 1.

Q values greater than 1 suggest that the rent component, or excess profit, of total U.S. corporate income is now quite large. Applying a model-based approach to national income accounts data, economist Simcha Barkai reaches a similar conclusion for the nonfinancial corporate sector as a whole.⁴

Without the presence of barriers to entry, this change in Q values is difficult to explain. The existence of rents should provide a strong incentive for the entry of new competitors, and rising rents should provide increasingly strong incentives as well. However, the expected competitive mechanism does not appear to be functioning.

This interpretation of the data is supported by the fact that it has become easier for firms to earn rents in successive years. Figure 2 displays the share of firms in the Peters-Taylor sample with a Q greater than 1 in one year that maintained a Q greater than 1 in the next year. This number rises from around 10 percent of firms in 1980 to around 40 percent of firms in 2015, suggesting increased inertia around rent extraction. In other words, it has become more likely that a firm that earns measurable rent will be able to do so in a subsequent year. This is consistent with the expected effects of a decline in competition.

There are also various other data from across the economy that point to reduced competition. (see text box below)

There is, of course, heterogeneity in the relative market power of firms. While the mean value of Q has trended upward, Q values for many firms reflect competitive returns. Figure 3 shows the distribution of Q values for individual firms in the Peters-Taylor sample averaged across 1981–1985 and 2011–2015. Both mean and median values have shifted right, and the right-hand tail of the distribution is more heavily populated, but many firms have Q values at or below 1.¹¹

There is also evidence of differing degrees of market power across sectors of the economy. Figure 4 displays the average Q values for the 200 largest U.S. corporations by market capitalization in the Peters-Taylor sample, sorted into several broad Global Industry Classification Standard sectors.¹² While there was a general upward trend in Q values across most sectors during the years 1981–1985 and 2011–2015, not all sectors ended the period with values significantly larger than 1.

It should be noted that a decline in competition is very likely not the sole explanation for the rise in observable corporate rent. Many economists have recognized that worker bargaining power has also diminished since the 1970s, a result of the decline in union representation, weakening of workforce protections, the decline in the real value of the minimum wage, and increased wage competition caused by expanding global competition—all of which have contributed to the rise in corporate rent. A recent paper by Economic Policy Institute economists Josh Bivens and Heidi Shierholz summarizes this case nicely:¹³ In an economy where competition is imperfect, the division of corporate net returns depends on how much power workers have to bargain for them.¹⁴ Therefore, the observable rise in corporate rent may well reflect the concurrent decline in worker bargaining power.¹⁵ The fact that these rents have not been competed away, however, even as they rise measurably, means that competitive entry is frustrated. But the authors do not attempt to estimate the quantitative contribution of each factor to the measured rise in economic rents.¹⁶

Moreover, persistent rents have dynamic implications. When rents are significant, incumbent firms have good reason to defend them. This can lead these firms to take economic, legal, or political steps to prevent the entry of new competitors, which, as a consequence, may prevent innovative products and processes from disrupting the marketplace.¹⁷ High rents can also deter incumbents from focusing their own efforts on developing and investing in innovation. The marked decline in nonfinancial corporate capital investment relative to corporate net income since 2000 is certainly consistent with rising market power.¹⁸

In the next section of the report, the authors identify potential barriers to competition that ought to be examined as sources of rising corporate rent. The report then discusses policy proposals that might reduce those barriers and explains why these policies should be augmented with a monopoly tax that will reduce corporate rent.

It is easy to think of ways in which normal competition can create barriers to entry that inhibit the equalization of profits, such as through the development of a significant new product or a more efficient production process for an existing product could certainly do it. As long as production techniques cannot be replicated, new entrants are either totally excluded or forced to earn lower rates of return. Some economists have pointed to technical superiority as a potential explanation for the rise in rents and increases in concentration.¹⁹

However, these types of barriers to entry should often be transient. Human beings are very good at imitation and reverse engineering; there is no good reason to believe that we have become less capable since 1980. It is implausible to attribute widespread rising rents exclusively to new products and new processes that cannot be replicated. Hence, we must look for other factors that can help explain why barriers appear to have increased over time.

Ineffective antitrust enforcement

Rising market power is in part attributable to the declining effectiveness of antitrust enforcement. Beginning in the 1980s, intentional policy decisions have hindered antitrust enforcement. Regulators largely abandoned challenges of mergers where market concentration was below the upper threshold of what is considered to be competitive.²⁰ Similarly, they became increasingly reluctant to bring unilateral conduct cases, leading to an environment in which dominant firms could aggressively pursue anticompetitive conduct—such as foreclosure—without legal repercussions.²¹

A recent empirical study by economist John Kwoka presents convincing evidence that merger enforcement decisions allowing increased concentration have often led to price increases.²² A 2016 study by economist Robert Kulick, which looked at establishment-level data of cement producers from 1977 through 1992, also found “significant price increases due to horizontal mergers after a relaxation in antitrust enforcement standards in the mid-1980s, but no evidence of systematic price increases before.”²³

Firms enjoying the gains created by entry barriers have every incentive to maintain and expand them. One excellent way to do so, made possible by large flows of rent, is to acquire potential competitors before they can fully establish themselves.²⁴ There is evidence that pharmaceutical companies have used so-called killer acquisitions to discontinue innovations at target companies in order to pre-empt competition and preserve revenue from existing investments.²⁵ This same motive, along with a desire to provide complements to goods and services that already produce network externalities, appears to generate some acquisitions in the softwar