Concentration Is Not Producing Higher Profits or Markups

The United States is in the middle of a renewed debate on antitrust policy. Although most antitrust experts favor keeping some form of the current policy, perhaps with slightly firmer enforcement around the edges, a growing number of policy advisors and elected officials favor radical changes that would target firms simply for the sin of bigness. They allege that rising concentration in most markets has given a growing number of firms significant market power that harms not just the economy, but broader society as well. Lax antitrust enforcement has supposedly led to diverse harms such as the stagnation in wages, fewer startups, increased political influence, and reduced innovation.

Two of the most important claims are that profits and markups are rising in many industries, as Joe Kennedy explains in an essay for Competition Policy International. These trends purportedly have been enabled by widespread increases in market concentration and resultant declines in competition. The popular press has published a multitude of articles and op-eds repeating this argument. These rely on several academic papers that purport to show significant rises in both profits and markups since the 1980s.

On closer inspection, however, both claims appear weaker than asserted. Profits have indeed risen from the turn of the century until a few years ago. However, they are still below the levels of the 1960s, when antitrust enforcement was much stricter; increases in non-financial domestic profits have been minimal; and they have been falling for several years. Markups are more difficult to measure and interpret. However, given the limited increase in profits, it seems likely that much of any increase is due to the growth in intangible capital (which is not included in markup measures and which makes it appear that markups over costs have gone up), rather than to market power. In these conditions, it is possible for a firm to have high markups but zero profits.

Getting these issues right is important, for if there is a structural increase in profits and in firms’ ability to raise prices, this raises important issues for antitrust policy and casts doubt on the entire antitrust consensus of the last half century. On the other hand, if most of this is a tempest in a teacup, which it appears to be, it suggests that radical reform of antitrust practice is not needed.