business investment. This combination suggests that growing
monopoly power is the underlying source of the profitability,
where the high profits come from high prices, restricted
output, and the erection of entry barriers rather than from
growing demand or rising productivity. When market power is
the source of high corporate profits, firms have less need to
make costly capital investments.
What might explain the rise in monopoly power? First, as The
Economist reports, U.S. Census data from over 900 economic
sectors in the American economy show that roughly two-thirds
of these sectors gradually became more concentrated between
1997 and 2012. This “creeping consolidation” is partly due to
less aggressive enforcement of antitrust laws than was
common in earlier decades.
Second, the technology sector, which contains roughly half of
the abnormal corporate profits, is growing as a share of the
economy, and firms in this sector possess market power
stemming from “network effects.” Network effects exist
whenever the benefits to any individual user of a product
increase when the number of other users increases. Once a
critical mass of users occurs, other users rush to adopt the
standard. For example, the immense popularity of Facebook’s
social media platform and Google’s search engine—now
considered industry standards—make it extremely difficult for
potential entrants to break into these industries to offer