Ten days after the White House issued an executive order and a brief that highlights growing concentration and decreasing competition in the US economy, professor Jay C. Shambaugh from the White House Council of Economic Advisers offers his perspective in an interview with ProMarket.
Last week, President Barack Obama launched a broad new antitrust initiative that called on federal agencies to tackle uncompetitive markets.
Blaming “anti-competitive behavior—companies stacking the deck against their competitors and their workers” for much of the American economy’s ills, Obama issued an executive order that instructed departments and agencies of the federal government to identify noncompetitive markets. The White House ordered federal agencies to report back within 60 days with a list of specific areas where they can promote competition, and a timeline of when and how they intend to do so.
Obama’s executive order was accompanied by a remarkable 17-page brief from the President’s three-member Council of Economic Advisers (CEA), which described the economic benefits of competition and at the same time observed a decline in competition across wide segments of the American economy. The CEA connects this decline in competition to several trends, among them an increase in concentration and rents, anti-competitive behavior by corporations, and a rise in M&A activity.
The CEA brief relies on extensive literature extolling the benefits of competition for the economy and for innovation (see for instance Shapiro, 2012), but also on numerous academic studies that examine the growing concentration among American firms. Examining the banking industry, Dean Corbae and Pablo D’Erasmo (2013) found that the share of the ten largest banks in the U.S. loan market grew from 30 percent in 1980 to 50 percent in 2010, while their share in the deposit market increased from 20 percent to 50 percent. Martin Gaynor, Kate Ho, and Robert Town (2015) found that concentration among hospitals grew to such an extent that the average HHI—a common measure of market concentration—for hospital markets increased to a level associated with three equal-sized competitors per market. Dennis A. Shields (2010) found significant levels of concentration in industries associated with food processing, from dairy and meatpacking to soybean processing. A similar increase in market concentration has been documented in the railroad market as well (Prater et al. 2012).
Jay C. Shambaugh, Professor of Economics and International Affairs at George Washington University (currently on leave) is the CEA member responsible for the brief. He joined the CEA as its third member in 2015, having previously worked as the CEA’s chief economist from 2009 to 2011. In an interview with ProMarket, he explains why the Obama administration’s current antitrust initiative is pro-business and speaks about the adverse effects of market concentration.
Q: What led to the publication of this brief?
The administration, and the CEA in particular, had had a lot of interest in issues surrounding market power and concentration for quite a while. I would say that if you can look at some of the initiatives the administration has done over time, whether it’s cell phone unlocking or things like that, that have gone on for a while, that address issues in this area.
In that sense, I don’t think it’s anything new. A lot of the work around spectrum, as well, has been geared at trying to make sure that different players in a market have access to a critical resource and try to make sure it’s being used efficiently.
There’s been a lot of work on this for a long time. More recently, our chair, Jason Furman, did a paper back in the fall with Peter Orszag that looked at potential links between rents and inequality. Then, we had some more work in the Economic Report of the President this year that touched on similar themes.
We had something in the Economic Report of the President. There were different pieces of that type of work thinking about either the connection between rents and inequality or concerns about declining dynamism in firms, some of the research that’s been done there in terms of how many start‑ups are there, how much entry is there.
It’s certainly an area that we’ve been touching on for a while. Then, more recently, the thought was that it would be useful to try to pull together a variety of strands of both policy work and research to concentrate them in one place and to try to give it a bigger push. That’s what we’re doing here.
The issue brief is trying to outline many of the issues that you see as potential signals of declining competition, and also lay out as clearly as we can how that may be problematic—problematic for consumers, problematic for workers, problematic for entrepreneurs in small businesses—and why promoting more competition might be a real positive thing for the overall economy.
Those themes were wrapped up in this executive order trying to challenge agencies that this can’t be just about merger enforcement. It’s got to be something that every agency is thinking about competition and market power when they’re using their executive authority.
Q: What has happened to the U.S. economy, and how long has this been going on? How strong would you say the empirical evidence is?
The first thing is there are a lot of very long‑term trends.
In that sense, we’re not trying to argue any one of these trends has a direct causal implication for any one other trend as much as saying there are a number of trends, many of which have been going on since the late ’70s, that when you start pointing at all of them, they line up in ways that suggest there may be less competition
Whether it’s the fact that firm entry has been declining for decades, whether it’s the fact that a variety of measures of concentration seem to have gone up for many industries, whether it’s the fact that when you look at profits and returns you’re seeing very high returns to the very top firms.
That extent to which the top firms’ profitability exceeds the median firm profitability, that measure has really shifted up over the last…
That’s distinctly possible. The other thing that we’ve seen, though, that is interesting is the persistence of those returns.
In a more fluid market where either your suppliers, or workers, or potential competitors were able to push on you, you might normally think excess profits arise and then disappear relatively quickly, but we’re seeing more persistence in the firm staying at the very top of the profit distribution as well as the massive gaps between those very top firms and the rest of the firms.
Beyond that you also do see just a real wave of mergers and acquisitions, which is something that is cyclical, and it’s not unusual given movements in markets, to see that when you put these different trends together. Again, many of them are long‑term trends.
It suggests that they could combine in a way to leave us with an economy that has less competition and less market competition pushing in areas that we think are important, whether it’s innovation or pushing on inequality and issues like that.
It struck us that it was something that was worth looking into. When you look at it, the work we looked at, it is not that merger enforcement has gone away in the last eight years. If anything, what we found was that there’s a lot of very active work being done by the DOJ and FCC on these issues.
One of the things that we touch on in the issue brief, and which then is really made very clear in the executive order, is that this can’t just be left to a few agencies who are in charge of mergers.
You need more of a whole‑of‑government approach to say, “Look, competition is important to the economy, both because it benefits people directly in the present and because it pushes towards innovation.”
The government needs to be looking out for this, because in the absence of the government doing its job to make sure there’s competition, you do risk that firms, over time, will accumulate market power and choke off that competition and entry.
Q: Regarding the long-term trends that you mentioned: some people say that the 1970s is the point in time where antitrust authorities started to look at antitrust specifically through the prism of efficiency and were not looking at other issues. Is it possible that the policy, the guidelines for mergers, and the treatment of the courts enabled the growth in concentration?
We really didn’t, honestly, try to delve too hard, especially on the historical side. As a number of economists sitting in an economic office within the White House, we really weren’t going to weigh in on how the courts were ruling or specific things in that area. That felt, to us, a bit more out of bounds.
As far as we could tell when we were looking at it, when we saw the concentration measures, the first question we had was, “Are we, as an administration, doing enough on antitrust enforcement?” What we see is that, yes, there were a number of things.
If you look at criminal antitrust fines and penalties, they’re going up. They are taking actions. It’s not that they’re sitting by and watching things happen. Instead, what we were more focused on was that you do see these patterns that suggest possibly less competition in the economy, and that was the thing that we really wanted to highlight.
Q: What are the tools that can be used to make sure that we don’t have too many players with excessive market power? What tools can regulators and policymakers use, if not antitrust?
Just to be clear, it’s not saying instead of antitrust. It’s certainly saying those activities need to continue, and the question is what more can you do? In some sense, it doesn’t fit a single lens very well, because what it often is is sector‑specific agencies taking very specific actions in their lane.
The way I often think of it is, it’s we’re asking them, when they’re considering decisions, to put their competition hat on as well and say, “If I looked at this through the lens of competition, are we making the right choice here?”
The example that we rolled out, just because it seemed like a very easy touchstone example for people, is making the filing with the FCC on the set‑top box issue where you say cable companies can have, effectively, a monopoly on this second product, this decision over what your cable box is, in the same way that AT&T used to have everyone lease their phone from AT&T.
When you’re in a situation like that, consumers generally get lower quality, with less innovation, at a higher price. For the FCC to think about that when making this ruling and hopefully rule in a way that would open that market up to more competition.
That, in and of itself, is not going to radically change the economy, but the goal would be that you have more innovation in that space. Consumers would get a better product at a lower price. That’s the kind of thing that needs to happen over and over and over across different agencies.
That’s why what the executive order does is charge agencies to come back to us in 50 days and say, “Here are some actions we can take. Here are some actions we’re already taking where we are thinking about this, and here’s some more things we can do,” to try to get this to become something that agencies are thinking about on an ongoing basis.
Q: When do you expect to release the replies and action plans you’ll receive from federal agencies?
There’s nothing specific in the executive order in terms of how it would be sh
ared. They are due from the agencies in 50 days. I believe the executive order specifies it goes to the head of the National Economic Council such that those things could be pulled and processes could be run from there.
We’re hopeful that the set‑top box was our first example. As I mentioned, there are a number of other things, whether it’s spectrum or other things like that, that, certainly, we’re already doing things in this vein. The hope is that, over the next eight months, you’ll see an ongoing stream of things that tie back to this theme where we say, “Here’s another thing that we can do.”
Some of them may seem really small, and some of them may be big. It’s an attempt to say that you need to keep the pressure on, and you need to keep this lens on when you’re thinking about how the economy is functioning.
Q: When you talk about concentration and market power, their outcomes can be manifested in reduced innovation, higher inequality, higher prices, or worse quality of services. During your research, did you find strong evidence that this is happening? Which one was more pronounced?
Honestly, they’re all things we worry about. When you see the declining firm entry, that certainly is the signal that this has the potential to be bad for small businesses. The growing concentration in market power and making it harder to enter industries, you hear about it not just on the entry side.
If you get too much concentration by firms at different choke points, they can then use their market power upstream to their suppliers if those suppliers are smaller firms. There’s a lot of ways in which this, from our perspective, saying you are worried about competition and worried about market power in no way is an anti‑business kind of thing.
It’s trying to say there are a lot of ways in which these issues are big problems for businesses as well.
Certainly, the classic way one talks about this is for the consumer—and the one thing we rolled out, the set‑top box, is very much a consumer issue—but honestly, the worker side of this is important, as well.
The notion is that if you have too many large firms in a particular labor market, the monopsony power can show up on the labor side as well. They may not really be competing over workers. They may take actions that break down the competition on the labor buying side as well, and that’s bad for workers.
That’s absolutely true. The evidence presented there is not suggesting that the monopsony power is hurting workers. It’s exactly as you say. The inequality side of this one would often think of as playing out, because either top workers…you have to separate.
It’s not just CEOs, which I think sometimes get the attention, but some segment of the workers are basically getting some of the rents from the very high profitability firms.
It’s also, to some extent, on the inequality side, that being lucky enough to get a job at one of these superstar firms, regardless of what your job is, means you do better relative to other people who do the exact same type of job you do at other types of firms.
That’s definitely true that that inequality side of things is what I was just mentioning, the concern on the worker side of monopsony power. There certainly is. You can go all the way back to the single‑company town that you used to see, where you have just one dominant employer in a town. The evidence is that’s bad for workers.
To the extent that there’s mobility and the workers can move away from those towns, that puts back the competition pressure from the labor market on firms.
You can certainly think of how some technology firms in Silicon Valley got in trouble for allegedly engaging in collusive non‑poaching agreements. That’s very hard to maintain if you have a really robust competitive market. If you have a smaller number of players and workers with a certain skill premium, that’s going to make it a little bit easier.
That’s the other way you might worry about how this affects the worker side.
Q: You mentioned tech firms. When we talk about tech firms, we usually tend to be concerned about platforms and big data. Not only do we see that these sectors tend to be very concentrated in winner‑take‑all markets, but also, they posses a great deal of information that can be used to track the behavior and the elasticity of demand of consumers, and use it to reduce consumer surplus. Do you see this as a possibility?
Just to be clear, that is one area that’s labeled in the report as a potential area for future consideration in the sense that it’s not clear to us the research is locked down one way or the other when we think about these issues.
It’s an issue that, as the economy changes over time, it’s one that seems it really needs to be thought through carefully to make sure that the exact type of scenario you just described is not a problem.
You want to make sure that, as a regulator, you’re thinking about the different ways in which a firm could have market power, even if that market is a very narrowly defined market, and making sure it’s not being abused in any way.
We’re not saying that’s happening as much as we’re saying the shifts in the economy and the shifts in the way that firms both acquire and may be able to use data raises some questions that really require serious thought.
Q: Some would argue that a century ago we had enormous railroads and finance monopolies, and now we are might be heading toward a reality where digital monopolies are becoming more entrenched.
That’s obviously something you wouldn’t want to be the outcome, to have nothing but digital monopolies. It’s an area of thinking about what data means and what the different types of platforms mean.
As we talk about in the report, there are different ways firms wind up with market p
ower. Sometimes it’s just through great innovation. If all they’re doing is innovating and providing better services at lower prices for better quality, then that’s not the issue.
The issue is, you might worry more if there are network effects that lead to an entrenched market position that makes it very hard for anyone to challenge that market position. Certainly, some of these new areas of the tech world make one just want to make sure that we’re paying attention to it.
Q: One of the reasons that monopolies or concentrated industries tend to be entrenched might be that the more concentrated you are, specifically in the bigger industries, the easier it is for you to influence regulation by capturing the ecosystem in which regulators operate. Do you think there might be a risk for regulatory capture in the tech sector?
There’s certainly the potential for that. I don’t think the issue brief really speaks directly to that concern. As we said, the executive order is asking agencies to make sure to use a lens of thinking about competition when they make decisions.
You could think of that as just trying to make sure they’re thinking of all the players outside of the ones that they deal with regularly, if you’re worried about that type of thing, but it’s definitely not something that we touched on directly in the issue brief.
Q: European regulators and policymakers seem to be more aggressive, more concerned about concentration among American companies. Do you feel that here in the US regulators should be as aggressive as the Europeans are in terms of concentration, competition, and antitrust?
In some sense, and this is what makes it very hard to generalize, antitrust is a market‑by‑market, firm‑by‑firm debate. As I just said, it is not the case that all market power is bad. There are times firms come by market power just because they built a better widget.
As long as they’re not operating in an anti‑competitive way or abusing that market power, there’s nothing necessarily wrong with that. There are times that there have been concerns that American firms may be a bigger target for regulators sometimes in other countries.
I certainly wouldn’t say that we should pivot to that mindset as much as saying exactly what we’re trying to lay out here, which is that there may be some evidence of growing concentration and that competition is a really fundamental part of a market economy. If you let competition go away, you wind up with worse outcomes.
From our perspective, there are sometimes discussions of tradeoffs between efficiency, inequality, and things like this. This feels like a win‑win one.
This feels like one where you can make the economy grow faster with better innovation and better productivity but have it also be one that’s distributed more equally through pushing back on some of the equality concerns that can come with rising rents.
You should absolutely be thinking about these types of issues, because you don’t get that many win‑win situations. They’re often tradeoffs. This feels like one where you can push forward on innovation and benefit consumers and push back on inequality.
We certainly think it’s an important area. I don’t want to comment on specific types of actions the European regulators are taking, just because I really do feel like the hardest thing about this is that national measures of concentration may not always be the best reflection.
Particular markets and real sensitive market analysis, which is what people at the DOJ and FCC are doing every day, is what needs to be done.
Q: When you consider the various challenges that the U.S. economy faces today, would you say that concentration and competition are high priority?
To me, it’s important. From my perspective, in the very long run, productivity is what matters to living standards. It is also one of the worst understood things. It’s often a residual in any kind of data work we do. It’s hard to sort out. It’s hard to figure out.
Any time there’s a button we could push that would improve innovation and improve productivity, and in particular a button we could push that would be good on other dimensions, we should be trying to push that button.
This is something that, from our perspective, could improve productivity and innovation. Therefore, it’s something that you should absolutely be doing. It’s not something that costs money. It’s not something that makes others worse off. It’s not anti‑business or pro‑business.
What it’s trying to do is make the economy work in the way that people like you, or myself, or anyone who’s an economist draws out that working in the models where the economy works right. Trying to get things working this direction is really important.
Q: Some people would characterize this as an anti‑big business, pro‑market move.
We definitely think of it as pro‑market. It’s anti‑abusive market power. It’s not saying anything about a bigger business or a smaller business. What it’s saying is that when firms get crowded out, when entry goes down, that’s potentially a problem.
That’s something that, again, it’s a trend that’s been going on for decades, and it’s one that no one initiative is going to reverse, but if you’ve got an action that you think might help, then it’s something you should be doing.
Q: When you’re considering specific actions agencies might take, do you also take into account the literature on behavioral economics?
When you’re trying to think about incentives and getting incentives right, how people would respond to the incentives in front of them is an important part of that.