Everything Old Is New Again: The Misleading Narrative About Concentration and Inflation
As inflation rates have risen to levels not seen in 40 years, antitrust populists have been quick to not let this crisis go to waste, laying the blame at the doorstep of the supposed increase in corporate concentration. Senator Elizabeth Warren (D-MA) suggests companies are hiding behind claims of increased costs to fatten their profit margins while economist Hal Singer has said that “general inflation can serve as a pretext for a coordinated price hike.” This view that corporate concentration is a root cause of inflation has intensified calls for more aggressive antitrust enforcement—including from President Biden who has called on the Federal Trade Commission and the U.S. Department of Agriculture to investigate price increases and anti-consumer behavior in the petroleum and meatpacking industries. As the midterm Congressional elections draw near, it is hard to fault President Biden for wanting to be seen as doing something about inflation. However, not only is more aggressive antitrust enforcement likely to be ineffective at combatting inflation, some economists have argued that it may even make inflation worse. For example, former Treasury Secretary Larry Summers notes that “policies that attack bigness can easily be inflationary if they prevent the exploitation of economies of scale or limit superstar firms.”
As with other populist antitrust ideas, this notion that corporate concentration is contributing to inflation is not a new one. During the last inflationary episode beginning in the late 1960s, there were similar calls to use more aggressive antitrust enforcement to tame inflation. With high inflation rates during the 1970s, the “belief that an inadequate antitrust policy is partly responsible” led to the “alarmingly real … possibility of an antitrust Armageddon.” This was nurtured by President Ford’s claim that a "return to the vigorous enforcement of antitrust laws” would bring inflation under control. Willard Mueller, former chief economist for the Federal Trade Commission, was of the view that “the presence of unrestrained market power creates an inflationary bias in contemporary America.”
However, the argument that corporate concentration contributes to inflation was no more persuasive then than it is today. A number of economists and antitrust scholars of the prior period found that there was no relationship, or perhaps even a negative relationship, between concentration and inflation. Legal scholar Milton Handler criticized the association between inflation and concentration by citing the lack of strong evidence and found that in years with high inflation, a “negative relationship between concentration and price changes [suggested that] rather than contributing to inflation, concentration probably dampened its effect.” Others remarked on the lack of a relationship between inflation and concentration with a number finding evidence that firms in concentrated industries dampen inflation when inflationary pressures are higher and respond to increases in costs only once inflationary pressures subside. Economist Phillip Cagan argued that these findings support the existence of a catch-up dynamic where concentrated industries do not “originate inflationary movements” but rather “delay inflationary impulses.”
As in the 1970s, there does not appear to be any relationship between concentration and inflation today. Back in January, ITIF examined the correlation between industry concentration levels in 2017 (the latest year for which Census data is available) and consumer price increases between December 2020 and December 2021 and found that it was effectively zero. Using the most recent data on consumer price changes between May 2021 and May 2022 yields the same conclusion with a correlation coefficient of just 0.05. In some highly concentrated industries, such as air travel and wireless phone service, prices actually fell over the last year. There is even evidence that firms are holding back price increases. The wholesale prices that firms pay for their inputs increased by 10.8 percent over the last year while consumer prices only increased by 8.6 percent. These data simply do not support the narrative that concentration is driving inflation.
Antitrust populists ignore these inconvenient facts in their quest for more aggressive antitrust enforcement. Proposals to abandon the consumer welfare standard in favor of an opaque “competitive process” standard risk raising prices for consumers, possibly creating further inflationary pressure, in order to protect high-cost, inefficient firms and small businesses. In a time of high inflation, we should not return to the failed antitrust populism of an earlier era.