Corporate Giants Break the Grip of Local Monopolies
Neo-Brandeisians view the increase in large firms in the service sector with fear and loathing, painting a story of corporate greed and small business suffering. The reality is simpler and vastly more positive. Big service firms are more efficient and provide consumers with more choice and cheaper prices.
Many services, just like many goods, get cheaper to produce when a firm produces more of them. Specifically, it has long been recognized that manufacturers can enjoy economies of scale, where the marginal cost of producing each additional unit declines. As goods became cheaper to mass produce during the Industrial Revolution, the advantages of scale outweighed the disadvantages of transportation costs, enabling consolidated firms to serve much larger geographic markets. And because of mass production, America became among the wealthiest nations on Earth.
By and large, services did not enjoy the same benefits of scale because production had to be localized to serve consumers where they lived. But thanks to digital technology, services that once needed to be produced in the same place where they were consumed (like a doctor’s appointment, buying a good, or finding travel advice) can now be sold across the country from a central hub (like a telehealth facility, e-commerce fulfillment center, or online travel company). As a general matter, the emergence of big service firms like Uber and Amazon has made local markets more competitive, American workers more productive, and consumers better off.
Service Firms are Serving More Markets
A new paper, titled “The Industrial Revolution in Services” by University of Chicago economists Hsieh and Rossi-Hansberg, precisely charts the growth of these big services. The authors found that the average service firm today serves many more local markets (defined as a “county, zip code, or metropolitan statistical area”) than it did in the 1970s. Large firms—the top 20 percent by number of employees—had the highest growth rates in the number of markets served.
Growing Service Firms Have Higher Fixed Costs
The authors found that when firms expanded to new markets, they spent more on fixed costs like R&D and facilities. That is, just as the concept of economies of scale predicts, higher sales volumes likely allowed firms to better absorb higher fixed costs and support competitive prices. In other words, as firms grew in size, they were able to enhance the quality of services, benefiting consumers.
Evidence from the financial sector is consistent with these findings. A paper looking at payment processors (intermediaries between merchants and customer banks) found that mergers lowered average costs thanks to economies of scale. Specifically, payment processors face massive fixed costs: data storage, processing infrastructure, and operational protocols. As a result, the authors found that “doubling payment volume would raise total operating costs by only 25–30 percent.” In other words, serving more customers dramatically lowered average costs. Because of the massive benefits of economies of scale, the authors expected the industry to consolidate in the coming years.
But better absorption of fixed costs clearly extends beyond financial services—indeed, tech markets are perhaps the best-known example of economies of scale. In their book Digital Dominance, Patrick Barwise and Leo Watkins summarized the nature of scale economies in tech:
Software and digital content have high fixed development costs but low-to-zero marginal (copying and online distribution) costs. Unit costs are, therefore, almost inversely proportional to sales volume, giving a big competitive advantage to the market leader.
As such, to preserve their edge, market leaders in tech industries need to outperform their competitors in R&D. As a recent ITIF report found, large Internet companies indeed spend just as much, if not more, on R&D as a share of revenue than their competitors. This type of Schumpeterian, dynamic competition that focuses on innovation, as opposed to price-focused, static competition, is a key feature of New Economy markets (telecommunications, AI, and other tech industries). Encouraging companies to compete on innovation and rewarding their risky R&D efforts is vital for long-term productivity growth.
National Firms Benefit Local Consumers
In its 2021 Executive Order on Promoting Competition in the American Economy, the Biden administration warned (referencing misleading rising national concentration figures) that “lack of competition drives up prices for consumers.” But, as we have seen, the evidence actually presents a different conclusion: Not only do national service firms drive down prices through increased efficiencies, but they also make local markets more—not less—competitive.
Specifically, when large corporations expand into new zones, local markets become less concentrated even if national concentration goes up. Put another way, the fact that the average company today serves more markets than it did in the 1970s is a powerful argument that U.S. markets are becoming more, not less, competitive. Indeed, the Hsieh and Rossi-Hansberg paper found that the top local firm had a lower market share in the 2010s than it did in the 1970s, especially in smaller U.S. cities. Other studies confirm that from 1976 to 2005, local industrial concentration steadily declined by approximately 25 percent.
And as growing corporations broke the grip of unproductive local monopolies, they brought down prices for consumers. Perhaps the best-known examples of this phenomenon are Uber and Airbnb. While Uber’s expansion into a local market increases its overall (or national) market share, one study found that it lowers transit prices by up to 40 percent compared to traditional taxis. Similarly, in the case of Airbnb, researchers found that entry of the firm managed to generate $57 of consumer surplus for each busy travel night and thus “keep hotel prices down as a result.”
But the benefits of expanding national firms go well beyond Uber and Airbnb. Evidence has long suggested that, for retail, Walmart’s entry lowers competitor prices by 1.5–3 percent and as much as 7–13 percent in the long run. Embracing the trend of passing on cost savings to consumers, Amazon is today the leader in low online prices. In a study of 14,000 products across online retailers, Amazon was, for the seventh consecutive time, found to be the cheapest retailer with “a 16 percent average price difference compared to rivals.”
Governments Should Reject Protectionist Opposition to Big Services
Big services usually face political opposition from local monopolies. Taxi drivers rallied against Uber in Paris and Athens, among other major cities. Auto dealers lobbied to prevent Tesla from selling cars directly to consumers—and therefore circumventing the auto dealership intermediary. French hotels even sued, and a court subsequently fined, Airbnb on the vague grounds of “unfair competition.”
The opposition to big firms we are seeing today is not based on enhancing U.S. economic welfare, but on achieving a radical anti-corporate political agenda. The reality is that although anti-corporate Progressives purport to care about ordinary Americans, their insistence on breaking up big business contradicts those goals. As the Hsieh and Rossi-Hansberg paper showed, big firms have made markets more competitive and productive, to the benefit of consumers and workers alike.
To be sure, progress entails some jobs and businesses will go away. But that’s just competition. Even if tempting, governments should not stand in the way of creative destruction; while protecting inefficient businesses might appease some small business owners in the short run, it will hold the economy back in the long run by stunting technological progress and limiting productivity growth.
Policymakers should instead focus on accelerating technological progress and helping displaced workers reorient themselves. If antitrust enforcers heed anti-corporate calls to take down big service firms or block their expansion merely because they are big, Americans will pay higher prices and earn less.
