French economist Thomas Philippon, author of the recent The Great Reversal, explains how Europe got to be better at free markets than the US and how much rising concentration is costing American consumers and workers.
Last month, the Federal Communications Commission voted to approve the $26.5 billion merger between T-Mobile and Sprint, thereby getting the controversial deal one more step toward completion (it had already been approved by the Department of Justice in July but is still challenged by state attorneys general).
To French economist Thomas Philippon, the decision to approve the merger, which would reduce the number of US wireless carriers from four to three, is “absolute lunacy.” Though it had been expected, the merger’s approval still shocked Philippon, an NYU finance professor and author of the recent The Great Reversal: How America Gave Up on Free Markets. “This is crazy and really shows you how corrupt the whole thing is,” he tells ProMarket. “The US has literally the worst service and the highest prices of all the developed world, and you’re moving from four operators to three? Are you kidding me?”
In Philippon’s native France, consumers currently pay 2.5 times less for mobile phone plans, on average, than Americans do. This wasn’t always the case: eight years ago, French consumers suffered from the same combination of high prices and bad service that Americans have to contend with: basic smartphone plans, with limited data and minutes, ran between €45 and €65. Like the US today, the market was controlled by three companies that refused to compete. Then, in 2011, regulators had licensed a new wireless provider, Free Mobile, which offered unlimited talk, text, and data for €20. The effect was immediate: the three incumbents began offering €20 plans as well. Within six months, prices dropped by 40 percent.
To Philippon, the above story epitomizes both the benefits of competition and the different paths taken by Europe and the US over the last two decades when it comes to dealing with monopoly power. While European authorities enforced competition laws and took on entrenched monopolies, the US essentially moved backward, opting for no antitrust enforcement and allowing concentration to grow.
The result: In industry after industry, the cell phone story repeats itself. Whether it’s airline tickets, high-speed internet, cable TV, or health care, US consumers pay much more, get worse service, and have fewer choices than their European counterparts. Philippon calls this the Great Reversal: Whereas the US was once the model of free and competitive markets and Europe was viewed as its decrepit, monopolistic uncle, today the opposite is the case—most European markets are now cheaper and more competitive than their US equivalents.
At the heart of this shift is a great irony: European regulators had been inspired by the American antitrust tradition that US regulators and policymakers had turned their backs on. As Philippon and his co-author Germán Gutiérrez showed in a series of papers, the subsequent decline in competition severely hurt US consumers and workers through higher prices, lower investment, and lower productivity growth. Philippon estimates that the lack of competition “has deprived American workers of $1.25 trillion of income”—more than the combined growth of real wages between 2012 and 2018—and calculates that returning to healthy competition would increase the real disposable income of the median household by about $5,000.
To learn more about how Europe got to be better at free markets than the US, we recently sat down for an interview with Philippon. In his interview with ProMarket, he explained how much rising concentration costs American consumers and workers and discussed the political roots of monopoly power.
[The following conversation has been edited and condensed for clarity and length.]
Q: The Great Reversal is an in-depth look at industry concentration and the implications of unchecked corporate power, but it started with a simple question: “Why are cell phone plans much more expensive in the US than in Europe?”
That was one of the basic questions I wanted to answer. There are a bunch of goods and services that used to be much cheaper in the US than in Europe. They are all now much more expensive in the US. I wanted to understand how that could happen.
There is really good research on this topic by Luigi Zingales and Mara Faccio. They used different data from what I was looking at initially, but they reached exactly the same conclusion: The prices in the US are 2.5 times more expensive. That’s crazy. It’s not a 10 percent difference—it’s literally 250 percent. It’s not something you can explain by saying that the US is a bit richer, and so some goods and services would be more expensive here.
I didn’t think, initially, that I would find a broad, systematic pattern. I thought I’d just find a few examples. But what I discovered through my research with Germán Gutiérrez is that there are many. It’s not just cell phones. It’s airline tickets that used to be cheaper and are now much more expensive in the US than in Europe. It’s telecom, where the US is absolutely terrible: The cost of broadband in the US is $68 per month, on average. In France, it’s $31. In Germany and Japan, it’s $35, in Korea $32.
I find that shocking. I remember vividly when I came to the US in 1999, and it was much cheaper to connect to the internet in the US than in Europe.
Q: What’s the reason for this shift?
I owe a great debt to Brookings and to Janice Eberly, who asked me to write a paper on why corporate investment in the US has been very weak. That’s a puzzle, because profit rates in the US are extremely high, so firms are making lots of money. Discount rates are very low, so they can borrow very cheaply. Stock markets reflect that by being very high. These factors usually tend to predict high investment, but we didn’t see high investment.
There are two explanations for what’s going on: One is there’s more investment in intangible assets, which are more difficult to measure correctly, and that accounts for some of the difference. But most of it, in fact, is because what we see in the data as high profits actually reflects monopoly rents.
Once you understand that, then the puzzle is gone. By definition, a monopoly is going to make a high profit rate, but would not want to expand its capacity to produce. That can easily explain high valuation, high cash flows, and low investment. Then the question becomes why there is more monopoly power today than 20 years ago.
“People who travel or have lived on both sides of the Atlantic know that the idea of Europe as lagging in terms of free markets is just not true anymore.”
Q: The US, you write, used to be the model for competitive markets, whereas Europe was dismissed as hopelessly monopolistic. When did this relationship start to reverse?
The US started from a baseline of highly competitive markets in the late ’90s and moved in the wrong direction, while Europe started from a level of weak competition but moved in the right direction. Somewhere in the late 2000s, they crossed. So today, many markets are actually more expensive and less competitive in the US than in Europe. Hence, The Great Reversal.
The irony is that all the good ideas that helped make European markets free came from the US. The reason airline tickets are cheap in Europe is because we have low-cost carriers competing with old legacy carriers. These low-cost carriers got the idea in part by looking at what Southwest was doing in the US.
Current European regulations of the goods market were all inspired by the US in the 1990s. That’s why we have lower barriers to entry and why the number of days it takes to open a business in Europe went from 30 to 5. Twenty years ago, the US was way ahead of Europe in that dimension.
That’s how we made the European market more competitive: by essentially being inspired and copying what was working very well in the US. That free markets are good, that you need competition, these ideas were not indigenous to Europe. They came from the US.
Q: And yet, many Americans today still view Europe as laggard. How do you explain that?
There are two reasons. One is that Europe is still a laggard in several dimensions: universities, public and private funding of innovation. But for consumer-friendly competitive markets, Europe has pulled ahead. I think the perception has changed slowly because the changes are not very noticeable from one year to the next.
I remember a conversation with an economist. I was telling him, “It’s amazing, airline tickets are so much cheaper in Europe now.” He said, ”Really? I never noticed it.” I asked him: “When was the last time you didn’t fly business?” That’s the problem: many people who write about these topics have no contact with these prices, so they don’t see them.
People who travel or have lived on both sides of the Atlantic know that the idea of Europe as lagging in terms of free markets is just not true anymore.
Q: How many of Europe’s markets, would you say, are actually more competitive than the US?
Most of them.
Q: Most of them?
More than half. It’s not true in every market. One example, for instance, is retail trade, and wholesale trade. Retail is still competitive in the US. But Europe is catching up.
Q: How did Europe accomplish this transition?
The reason it happened is the single market.
Q: You make this argument in the book, that because European nations were essentially prone to protectionism and national champions, when the European institutions were built, rules were set in stone ensuring regulators would be independent.
Absolutely. The creation of the single market came with a regulatory design based around strong, independent regulators, something that was inspired by the UK and the US. The irony is that Europe did it that way because we couldn’t agree on anything else. Europeans didn’t trust each other, so we wanted to have independent regulators—nobody wanted to take the chance that other countries could influence the regulator in their favor.
Of course, if you look at Europe’s overall performance, it’s a mixed bag, because there are many other important factors. In terms of innovation, you need to look at universities; in terms of science, you need to look at VCs, the Department of Defense, and the capital markets, which are still more developed in the US. In terms of labor, some countries don’t have a really flexible labor market.
So it’s not as if Europe has become America because it reformed one part of its system. What’s striking is that the part it reformed is working very well. People do get better service and pay less. The median household in Europe has had gains in purchasing power year on year, unlike the US, where essentially all the wage gains were eaten up by higher prices for the past 20 years.
Q: You identify the period that Europe and the US “reversed” as the early 2000s. Others date the beginning of the decline in US competition to the 1980s.
I disagree with people who argue that the US started to lose competition in the 1980s or ‘90s. I think they’re getting confused, because concentration is not always a bad thing. You can have good concentration and bad concentration.
We find clear examples of good concentration, where you have more competitive markets and more efficient leaders who take over market shares. If you have more competition, then weaker producers are essentially kicked out and you end up with a more competitive market, but also a more concentrated market. That’s what was going on in the ’80s and ’90s in the US, to a large extent. It was a good type of concentration.
Q: Wasn’t the same type of thinking that allowed for what you call good concentration the same sort of thinking that allowed bad concentration to happen? Wasn’t “good concentration” what enabled the lax antitrust enforcement that led to “bad” concentration?
Yes. I was referring to the actual markets, not the ideology in the background. For the actual market, I think the trouble in the US starts in the late 1990s or early 2000s. Before, we mostly had good concentration and also strong antitrust. The AT&T case in the ’80s happened under Reagan and was the biggest antitrust case ever. In the late 1990s, you had the Microsoft case. It’s not true that enforcement was very weak.
The ideology for which people blame the Chicago School—that indeed started much earlier, in the ‘70s, and was very gradual. I think we also need to be precise about what exactly happened.
If you look at the main argument of the Chicago School, it was that high profits always attract new competition. Therefore, you never need to worry about monopoly power. You’d enforce regulations against gougers and price-fixing, but you don’t need to worry too much about excessive market power by firms because if that leads to excess profits, then there will be entry by new competitors. Entry would keep the system in balance—that was the key idea.
The problem is that Chicago Schoolers essentially bet the farm on that idea, without taking the time to think whether it was really true or not. What the data show is that this was roughly right in the ’70s and ‘80s when they were making that point. But it’s not true anymore. Since 2000, the correlation between entry and profit across industries went from being positive to essentially being zero for the past 15 years.
In a world where entry isn’t balancing excessive profits, then the Chicago School view that you don’t need to worry about market power becomes wrong.
The idea that free entry will always balance the system was very naïve, I think. On the other hand, one of the reasons that we don’t have free entry in many US markets today is because of government regulations. The Chicago School has always warned about politicians and regulators being captured by lobbyists. That’s the part the Chicago School got right, in my opinion.
|“In a world where entry isn’t balancing excessive profits, then the Chicago School view that you don’t need to worry about market power becomes wrong.”
Q: You calculate that the lack of competition has deprived American workers of $1.25 trillion of income. How did you arrive at that figure?
Suppose you could get back to the degree of competition the US had in 2000. Thinking about what impact that would have on prices directly, my estimate is that it would save about $300 per month for the median US household.
Given that we know that many households don’t think they could cope with an unexpected bill of $500, that’s a big deal. In terms of direct savings per year for all US households, that’s something like $500-$600 billion of direct savings each year, just from lower prices.
Once you take into account that more competition and lower prices lead to more activity, employment, and investment, then the total increase in private GDP would be roughly $1 trillion.
Of course, it would not be neutral. Lower prices mean profits will go down by about $250 billion and labor income would grow by $1.25 trillion. That’s a lot of money.
Q: The sole focus of US antitrust since roughly the 1980s has been consumer welfare. Your findings seem to show that the “consumer welfare standard” has failed on its own terms: Americans today pay a lot more than other countries.
I’m actually not in the camp that argues we need to change the consumer welfare standard. We just need to apply it. Consumer welfare is not just about prices—it’s innovation, it’s product diversity. In Europe, we simply apply it, perhaps more flexibly.
Q: You dedicate a big part of the book to firms lobbying for regulations that protect monopoly rents. How many of the trends you describe—low investment, higher prices, rising concentration—are the result of firms lobbying against competition?
I would argue it’s a significant part of it, but it’s very hard to get to the bottom of it because the data on lobbying is not very good. What I’m struck by is that even with the data we have, the effects of lobbying are still very clear at the state level, at the federal level, across industries—when you see a big increase in lobbying, firms succeed in getting the regulations they want, or avoiding antitrust actions. The more we refine the data, the more it becomes consistent with this idea.
But of course, incumbents can also use strategies that limit competition without lobbying: they can use predatory strategies, or the threat of predatory strategies, they can buy nascent competitors, etc.
Q: US wireless service being much more expensive has a lot to do with lobbying. In general, the telecom sector seems emblematic of the dynamic you’re talking about.
The best example is France, where the three incumbents were lobbying to prevent entrants from getting a license—and lost in 2011. That’s how French cell phone prices went from being much more expensive to being much cheaper than the US.
If you look at internet providers, the average French household has five providers to choose from. The average US household has less than two. And even when there are two, both offer $79.99 as their price.
The companies managed to convince the regulator that nothing can be done about it, so there is nothing to worry about. That’s pure lobbying. Likewise, the argument that “We need monopoly power because otherwise there will be no investment and no innovation,” is also a self-serving argument used by lobbyists. It’s not true according to the data.
Q: How can the US become more like Europe? Many of the solutions you offer, like cracking down on anticompetitive mergers and acquisitions, are antitrust-related.
The solutions tend to be very specific to each industry.
For instance, if you look at airlines, it’s very clear that you need new airlines and you need them to compete, and for that, they need slots at the busy airports. Right now these airports are totally full, and all the slots go to the incumbents. As long as you don’t change that, nothing is going to happen. For internet providers, you need to make sure that every household in the US has at least three providers to choose from. To do that, you need to force the incumbents to share some of their infrastructure to make sure there’s strong competition.
Q: Lobbying against competition is not industry-specific though, but systemic. Can anything be done about that?
There, I wouldn’t hold my breath. If you want to do something that would survive in the long term, you need to do something about campaign finance. But I don’t think there’s political consensus on reversing Citizens United.
We need to find solutions that don’t require major changes in campaign finance—though in the long-term that’s what we need—because otherwise we could wait forever. The thing I learned from the book is that competition is a public good, so it’s nobody’s interest to protect it. It’s surprisingly fragile, because nobody has an interest in protecting free markets, apart from a diffuse group of consumers and voters who usually cannot coordinate their actions.
I think we first need to find practical solutions that make a difference. Millions of households in the US are spending more than $100 per month on cellphones—that’s absolute lunacy. If you think that’s normal, then you’re never going to ask for anything. Once you’re aware of it, maybe start complaining about it, then you can figure out that the FTC should be more aggressive. I think that’s feasible.
So I would start small, at the state level, by convincing people they’re getting ripped off and should complain about it. If people see that things are getting better, they might eventually support more systemic solutions.
Q: One argument you make is that we must let the government make mistakes: “Tolerating well-intentioned mistakes is a part of good regulation, provided there is a due process and a mechanism to learn from these mistakes.”
Absolutely. Otherwise, regulators would never do anything. When European regulators interact with their American colleagues, they feel that American regulators are so fearful of everything. They don’t dare to do anything. They think if they lose a case, it’s the end of the world. If you lose a case you lose a case, what’s the big deal? You should lose a case. If you never lose a case that means you’re way too careful.
On top of that, I think sometimes the cost of the mistake is very asymmetric. If you block a merger that maybe should have been approved, they could ask for the same thing two years later.
|“When European regulators interact with their American colleagues, they feel that American regulators are so fearful of everything.”
Q: You seem to support deregulation. You write that deregulation unleashes creativity and innovation and increases demand for skilled workers. Many would argue that deregulation also contributed to the rise of concentration and market power.
It depends on what you call regulation and deregulation. You should always be thinking of good and bad regulation. There is no such thing as “we should regulate more”—we should regulate well.
As a principle, any new regulation contemplated in the US should be judged in part according to the basic question, “Is it going to create barriers to entry?” When you get to a point where the market is so dominated by big firms, that has to be a priority. That means sometimes you’ll want to kill some regulations and other times you want to have some regulation because of that.
Let me give you an example. Say you force the banks to have an API that people can use to share their banking data. That’s a regulation that would increase entry because you would allow fintech firms to compete with the banks in providing advice to consumers.
Q: Europe may have done better than the US when it comes to enforcing competition, but there have been signs that this may be changing, with renewed talk of national/industrial champions.
That’s an old strategy that they tried to bring back, but thankfully it’s going nowhere. People get very confused. They say, “We need national champions because we want Europe to be able to have a Google or an Apple.” This is totally bogus.
The reason Europe doesn’t have a Google and a Facebook has nothing to do with antitrust or any kind of regulation. It’s because it doesn’t have the same universities and because it doesn’t have a single market for services where these firms could grow very quickly.
What I find worrisome is that I hear the same thing in the US: “We need [national champions] because of China.” That’s ridiculous. That’s neither here nor there. You do want to compete with China. But competing with China has got absolutely nothing to do with letting Facebook have monopoly power.