American policymakers are giving more and more credence to the role of monopoly concentration in the economic restructuring that started in 1980, in the Reagan/Thatcher era, that shifted power and rewards from labor to capital. Importantly, these experts don’t just see monopoly as a problem; even basic economic courses show in toy models that they increase prices and decrease output. They also acknowledge that stagnant wages, rising profit share of GDP and escalating wealth concentration are bad outcomes economically and societally.
A new paper by Fed economists Isabel Cair ́o and Jae Sim describes how they developed a model to simulate the impact of companies’ rising market power, in conjunction with the assumption that the owners of capital liked to hold financial assets (here, bonds) as a sign of social status. They wanted to see it it would explain six developments over the last forty years:
Real wage growth stagnating and lagging productivity growth
Pre-tax corporate profits rising rapidly relative to GDP
Increasing income inequality
Increasing wealth inequality
Higher household leverage
Increased financial instability
And it did! For a model to have pretty decent fit for so many variables is not trivial. The first are what the model coughed up, the second, in parenthesis, are the real world data:
We’ve embedded this readable paper at the end of the post. The authors did quite a few sensitivity test and also modeled some alternative explanations, as well as showing panels that compared model outputs over time to real economy outcomes. They also recommend wealth distribution as a way to dampen financial crises, or even just taxing dividends at a healthy level.
Bloomberg wrote up the paper, an early indicator that it might get traction in official circles, and quoted Matt Stoller:
Matt Stoller, the author of “Goliath: The 100-Year War Between Monopoly Power and Democracy,” said both parties are culpable for the concentration of market power. Change is afoot because lawmakers realize they’ve ceded too much authority to large companies, he said.
“What you are seeing in the last five years is a shift where lawmakers think democratic institutions should be making more of the decisions,” Stoller said.
The anti-monopolists are on a roll. Matt’s colleague, the founder and head of Open Markets, Barry Lynn, wrote the cover story in the current Harpers Magazine, The Big Tech Extortion Racket: How Google, Amazon, and Facebook control our lives.
I strongly urge you to read the article in full. Lynn describes how America first grappled with monopoly power with the development of railroads and the telegraph. Their answer was regulation:
For a century and a half, Americans used common carrier policies to ensure the rule of law in activities that depended on privately held monopolies. These rules served as a pillar of American prosperity through much of the twentieth century. By neutralizing the power of all essential transport and communications systems, the regulations freed Americans to take full advantage of every important network technology introduced during these years, including telephones, water and electrical services, energy pipelines, and even large, logistics-powered retailers. Citizens did not have to worry that the men who controlled the technologies involved would exploit their middleman position to steal other people’s business or disrupt balances of power.
Lynn explains how this has all gone pear shaped in the Internet era. The tech giants’ access to personal information enables them to connect individuals to services they are presumed to like with enough success to drive more and more activity, transactions, and ad revenues through their platforms. Recall that tailoring also allows for price discrimination. Users of Apple devices have been shown higher airline ticket prices than PC/Android customers.
Amazon has preyed on third party sellers by copying their goods, as well as demanding more and more of the end sales price. This isn’t a new trick. One of my former lawyers, who represented some beauty, cosmetics and dietary supplements entrepreneurs, warned them never to take orders from Walmart. The Bentonville giant would attempt, usually successfully, to place bigger and bigger orders so as to become the little company’s biggest customer, by a large margin. Walmart would then squeeze the vendor to lower its price, which had the effect over time of wiping out profits and often leading to business failure. Walmart didn’t care. To them, the world is awash in products. But Lynn sees Amazon as more predatory:
Back in the day, Walmart’s goal was simply to force manufacturers to offer it lower prices in order to undersell and bankrupt rival retailers. Now that Amazon has effectively killed off all its online rivals, its model is to pit every seller and trader on its website against one another in a carefully orchestrated scramble to be placed first before the eyeballs of the busy buyer. Amazon gets to sell both access to the market and protection from its own thuggish behavior.
Having said that, it’s disappointing to see Lynn demonstrate such a complete misunderstanding of Uber that he includes it as one of his monopoly villains. The fact that Uber has done damage to local taxi companies has zero to do with monopoly power or network effects. Uber’s app isn’t special and Uber has no cost advantages over traditional cabs; in fact, it is high cost provider. Nor are there meaningful barriers to entry to operating a local transportation business. Uber is a pure and bizarre case of predatory pricing funded by very deep Silicon Valley pockets.
Unfortunately, the discussion of Uber suggests an intellectual blindness to the anti-monopolists, that they have such a strong idee fixe that they wind up in “If the only tool you have is a hammer, then every problem is a nail” mode.
A final development, and I must confess to needing to read the court filings to do it justice, is the brazen effort by Apple and now Google to crush games giant Fortnite for trying to go around the app store choke points. “Tying,” or requiring the buyer of one product (like Apple products) to buy other products (apps only through them) is a per se violation of anti-trust laws. Fortnite would seem to have a very strong case, but Apple has just said it is also cutting Fortnite off from developer tools by August 28.
Even big player like Fortnite can’t afford to wage this legal war unless it gets an emergency injunction. But this sort of thuggery usually happens less visibly and with companies too small to do anything other than capitulate. If Fortnite can get the courts to restrain Apple and Google while they duke it out in court, expect this to be a very important case. Let’s hope Fortnite can afford to proceed.
00 Market Power, Inequality, and Financial Instability – 2020057pap
