This presentation by Jonathan Baker, Research Professor of Law, American University, Washington College of Law, was made during the discussion “Market Concentration” held at the 129th meeting of the OECD Competition Committee on 7 June 2018. More papers and presentations on the topic can be found out at oe.cd/2gw.

1. MARKET POWER AND MARKET
CONCENTRATION IN THE US
Jonathan B. Baker
American University Washington College of Law
OECD Competition Committee
Hearing on Market Concentration
June 7, 2018

2. Overview
• Reasons to think market power is substantial and has
been growing
• Market power vs. scale economies
2

3. Substantial and Growing Market Power
1. Insufficient Deterrence of Anticompetitive Coordinated
Conduct
• Insufficient deterrence of express cartels (criminal)
• Steady rate at which DOJ uncovers them
• Penalties and damages are on average too low
• No evidence of systematic chill to procompetitive conduct or
excessive compliance expenses
• Insufficient deterrence of tacit collusion leading to higher prices
• Probably harder to deter than express cartels (criminal)
2. Insufficient Deterrence of Anticompetitive Mergers
• Retrospective analyses of “close calls” allowed to proceed
• Manufacturing mergers systematically raised margins without
lowering costs
3

4. Substantial and Growing Market Power
3. Insufficient Deterrence of Anticompetitive Exclusion
• Antitrust rules governing exclusion were relaxed the most
• Unconvincing interpretation of empirical literature on vertical practices
• Vertical ≠ exclusion but correlated
• More than one-quarter of international cartels used vertical
restraints to support collusion, as by deterring cheating or entry
• Prices were higher and output lower in states where RPM was
subject to rule-of-reason review
• Addresses identification problem
• Several recent empirical studies find competitive harm from
vertical integration
4

5. Substantial and Growing Market Power
4. Market Power is Durable
• Average cartel cut short by antitrust enforcement lasted 8 years,
and many lasted 40+ years
• Many near-monopolies persisted for decades before eroding
5. Increased Equity Ownership of Rival Firms by
Diversified Financial Investors
• Large institutional investors collectively own 2/3+ of private
equity, up from 1/3 in 1980, so investor ownership of rivals is
common
• When rivals have common financial owners, they compete less
aggressively and prices rise

6. Substantial and Growing Market Power
6. Increased Governmental Restraints on Competition
• occupational licensing, patent scope, perhaps lobbying to limit
rivalry (e.g., citizens petitions at FDA)
7. The Rise of Dominant Information Technology Platforms
• Some reasons for success likely insulate them from competition
in some major markets
• E.g. network effects, intellectual property protection, endogenous
sunk costs, & the absence of divided technical leadership
• Average price-cost margins in the US increased after 1990
• Probably reflecting in part increased market power by firms that have
made substantial fixed investments in information technology,
including IT platforms
6

7. Substantial and Growing Market Power
8. Oligopolies are Common and Concentration is
Increasing in Many Industries
• Many sectors have become substantially more concentrated
over recent decades, and the firms exercise market power,
including airlines, brewing, and hospitals
• Economy-wide evidence shows modest increases in
manufacturing concentration, and many industries with rising
concentration remain unconcentrated
• But the economy-wide evidence is less reliable than industry studies
7

8. Substantial and Growing Market Power
8. Oligopolies are Common and Concentration is
Increasing in Many Industries, cont’d
• Evidence involving broad national aggregates is consistent with
rising overall concentration or increased multi-market contact
• High and growing concentration in many labor markets
8

9. Substantial and Growing Market Power
9. Decline in economic dynamism
Market power is a leading explanation or a plausible contributing
explanation for various long term trends:
• Secular slowdown in business investment
• Rising profit share of GDP
• Slowed rate at which firms and plants expand when they become
more productive
• Declining rate of startups
• Growth and productivity gains increasingly coming more from
incumbents than entrants
• Growing gap in accounting profitability between the most and
least profitable firms
9

10. Market Power vs. Scale Economies
• Is there a benign explanation?
• Increased scale economies and temporary returns to the first firms
to adopt new information technologies in competitive markets?
• In many industries, efficient firms have grown in scale
• high fixed costs of investments in information technology
• network effects
• increased scope of geographic markets
• reductions in barriers to international trade
• Hence concentration and price-cost margins could both rise
even if markets are competitive
• Also, the first firms to invest in IT may earn substantial rents
• These should be temporary with dynamic competition, if rivals follow
suit with investments of their own
10

11. Market Power vs. Scale Economies,
cont’d
• Six reasons for concern about market power cannot be
reconciled with the benign alternative
• coordination, mergers, and exclusion not deterred
• market power is durable
• increased common equity ownership of rivals softens
competition
• government restraints on competition are on the rise
11

12. Market Power vs. Scale Economies,
cont’d
• Benign alternative at best a partial explanation but not
the full story for the other three
• Dominant IT platforms
• benefitted from scale economies and first mover advantages, but
also able to protect their position by excluding rivals
• Rising industry concentration in various sectors
• often accompanied by market power (evidence independent of
concentration)
• higher fixed expenditures can deter entry and soften competition
12

13. Market Power vs. Scale Economies,
cont’d
• Benign alternative not the full story, cont’d
• Reduced economic dynamism
• The benign explanation supposes profits are rising because
dynamism is increasing
• But the evidence previously discussed instead shows reduced
dynamism
• Also, if economic dynamism were increasing, corporate profit
streams would be riskier, but the financial markets appear to
view corporate streams as less risky than in the past
13

14. Summary
• Market power has been growing in the US economy
• Evidence about market concentration in various industries
is one reason to think so
• The US needs to strengthen antitrust rules, institutions
and enforcement
• If the best remedy for a competitive problem is structural, it will also
reduce concentration or prevent its increase
• If non-economic harms from market power or concentration are
important, stronger antitrust would reduce them too
14

15. For references and further discussion
• Jonathan B. Baker, The Antitrust Paradigm: Restoring a
Competitive Economy
• forthcoming in 2019 from Harvard University Press
• Jonathan B. Baker, Market Power in the U.S. Economy
Today
• Policy Brief, Washington Center for Equitable Growth, March 2017
• available at http://equitablegrowth.org/research-analysis/market-
power-in-the-u-s-economy-today/