66 Finance & economics The EconomistDecember 14th 2019
W
hen thomas philipponmoved from France to America in
1999 to begin a phdin economics, he found a consumer para-
dise. Domestic flights were dazzlingly cheap. Household electron-
ics were a relative bargain. In the days of dial-up modems Ameri-
cans, who were charged a flat rate for local calls, paid far less than
Europeans to get online. But over the past two decades, Mr Philip-
pon writes in “The Great Reversal”, this paradise has been lost.
Europeans now enjoy cheap cross-continent flights, high-street
banking, and phone and internet services; Americans are often at
the mercy of indifferent corporate giants. Perking up their econ-
omy might mean cutting those giants down to size.
Much that has happened to the American economy since the
1990s has not been to the typical worker’s advantage. Growth in
output, wages and productivity has slowed. Inequality has risen,
as have the market share and profitability of the most dominant
firms. Economics journals are packed with papers on these trends,
many of which argue that the dominance of big firms bears some
blame for other ills. Between 1987 and 2016 the share of employ-
ment accounted for by firms with over 5,000 employees rose from
28% to 34%. Between 1997 and 2012, this newspaper reported in
2016, the average share of revenues accounted for by the top four
firms in each of 900 economic sectors grew from 26% to 32%.
Two rival stories vie to explain the rise in concentration. One is
that domestic competition has been weakened by lax antitrust en-
forcement, anticompetitive practices and regulatory changes
friendly to powerful firms. This is Mr Philippon’s view. Some econ-
omists reckon, though, that concentration is rising because of the
success of superstar firms—highly innovative and productive
companies that have shoved aside unfit competitors. Either expla-
nation could account for the size and persistent profitability of in-
dustry-dominating companies. But the implications of each for
future growth—and policy—differ greatly. Which is right?
If concentration is caused by ultra-productive firms outcom-
peting weaker rivals, then investment ought to rise as those firms
scale up to exploit their competitive edge. Investment, however,
has been disappointing across the American economy. In the 1990s
a statistic called Tobin’s q(a measure of a firm’s market value rela-
tive to the cost of replacing its assets, named after an economist,James Tobin) closely tracked rates of net investment. A high To-
bin’s qindicates that future profits are likely to be high relative to
the cost of expanding production. That suggests leading firms
should scale up or see a flood of investment by competitors seek-
ing to divert part of that profit stream. In this millennium, how-
ever, investment has lagged behind what one would expect, given
the level of Tobin’s qacross the economy. A finer-grained analysis
shows that the most concentrated sectors account for nearly all the
investment shortfall. The change could be caused in part by a shift
in investment from tangible capital, such as buildings and ma-
chines, to harder-to-measure intangible capital, such as intellec-
tual property, brand value and firm culture. Superstar firms may
invest more in intangible capital. But accounting for intangibles,
says Mr Philippon, narrows but does not close the investment gap.
Then there is productivity. If concentration is mainly caused by
the triumph of superstar firms, it should be rising. Here the data
are murkier. The authors of “The fall of the labour share and the
rise of superstar firms”, a forthcoming paper in the Quarterly Jour-
nal of Economics, find a clear link between size and productivity
(bigger firms are more productive) and between industry concen-
tration and patenting (which they use as a proxy for innovation).
But the relationship between concentration and measures of pro-
ductivity is less clear, particularly outside manufacturing. Mr Phil-
ippon, on the other hand, finds a positive and statistically signif-
icant relationship between concentration and productivity in the
1990s but not more recently. What seems clear is that even as con-
centration has risen across the economy over the past two decades,
the rate of productivity growth has not. If superstar firms are in-
deed a force for concentration, their unique capabilities have not
translated into broader gains for the American economy.
Few economists—or Americans—would deny that there are
problems with competition in certain sectors, including health
care, finance, telecoms and air travel. The most heated arguments
about corporate power, however, concern tech giants. They have
not, for the most part, used their market power to raise prices; on
the contrary, much of what they provide to consumers is free. The
most aggressive invest heavily and eke out rather modest profit
margins. Comparisons with Europe are not very helpful, since the
continent has mostly failed to produce big and innovative rivals to
Google, Apple and Amazon. Would it really be wise for America to
carve up its tech champions?The harder they fall
As Mr Philippon notes, economic power is not all that matters.
America’s tech giants have gobbled up competitors and spent lav-
ishly on political donations and lobbying. There is no guarantee
that superstars, having achieved dominance, will defend it
through innovation and investment rather than anti-competitive
behaviour. And even if large platform firms are perfectly efficient,
economically speaking, Americans might worry about their influ-
ence over communities, social norms and politics.
There is no obvious right answer to the question tech giants
pose. It was far from clear, in 1984, whether dismembering at&t
would be remembered as a triumph, a fiasco—or simply nothing
much. The choice facing American regulators is harder now, pre-
cisely because of America’s lack of dynamism. Since innovative,
productivity-boosting, socially useful firms come along so rarely,
it seems risky to tackle tech behemoths too vigorously, lest doing
so weaken the economy’s most vibrant parts. But that reticence
may prove a recipe for long-run stagnation. 7Free exchange Mighty market power dangers
A new book argues that anti-competitive firms are killing American innovation