Question

What are the legal foundations that the federal government bases its decision to reduce market power?

Answer 1

Firms exercise market power in their output markets as sellers either by raising prices relative to what they would charge in a competitive market or by reducing quality or convenience or otherwise altering terms of trade adversely with their customers. Firms can also exercise market power as buyers by lowering prices or altering terms of trade adversely to sellers.
While seller market power has been more extensively studied, many of the reasons for concern about its exercise in the U.S. economy today are also reasons for concern about the exercise of market power by buyers. Some of those reasons suggest that sellers exercise substantial market power, and others suggest that the exercise of market power has been widening for decades—extending to more markets, increasing in importance within markets, or both. None is decisive individually, but collectively they make a compelling case that market power has become a serious problem in the U.S. economy.
Among those reasons are:

• Insufficient deterrence of anticompetitive coordinated conduct
• Insufficient deterrence of anticompetitive mergers between rivals
• Insufficient deterrence of anticompetitive exclusion
• Market power is durable
• Increased equity ownership of rival firms by diversified financial investors
• The rise of dominant information technology platforms
• Oligopolies are common and concentration is increasing in many industries
• Increased governmental restraints on competition
• The decline in economic dynamism

Harms within the affected markets

For the most part, antitrust analysis adopts what economists refer to as a partial equilibrium framework, looking at competitive harms within the markets potentially affected by the exercise of market power. From that perspective, the exercise of market power by sellers (in output markets) is harmful in several ways, among them:

• Wealth transfer and allocative efficiency loss
• Wasteful rent-seeking
• Slowed productivity improvements and innovation in affected markets

Economy-wide harms

Looking beyond the individual markets affected by market power, the exercise of market power is harmful to the U.S. economy as a whole. Although competition operates market-by-market and industry-by-industry, the scope of market power can affect the overall economy. The resulting harms are not limited to the participants in the particular markets in which competition has declined. Instead, the exercise of market power may result in slowed economic growth and increasing economic inequality.

Slowed economic growth

The cross-national and cross-industry studies undertaken by the McKinsey Global Institute, summarized by William W. Lewis in 2004 for a popular business audience in “The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability,” demonstrate that differences in competition in product markets across nations are likely as important as cross-national differences in macroeconomic policies and more important than cross-national differences in labor and capital markets in explaining variation in productivity and economic performance.63 National economies do better, Lewis concluded, when competition is both “intense” and “fair” (not distorted by governmental subsidies to less productive firms).64 Another leading expert on business strategy, Harvard Business School’s Michael Porter, reached a similar conclusion from a large cross-national study. Porter found that “vigorous domestic rivalry” in an industry helps make that national industry successful.65

To similar effect, economists seeking to understand why some nations have grown wealthy consistently find that impediments to competition—which are frequently imposed at the behest of private interests with a stake in protecting existing economic and social arrangements—impede innovation, growth, and prosperity.66 These studies reinforce the plausibility of the connection between the systematic widening of market power by firms and the decline in dynamism in the U.S. economy over the past few decades.

When firms and industries can secure long-lasting political power through their size and lobbying influence,67 their economic and political power can reinforce each other in a vicious circle. Market power may give firms the resources to create and exploit political power, which they may use to protect or extend their economic advantages—and then invest some of the resulting rents to extend their political power.68

Increased inequality

The exercise of market power also probably contributes to economy-wide inequality because the returns from market power go disproportionately to the wealthy. Increases in producer surplus from the exercise of market power (the wealth transfer) accrue primarily to a firm’s shareholders and its top executives, who are wealthier on average than the median consumer. In a recent year, the top 1 percent of the wealth distribution held half of stock and mutual fund assets, and the top 10 percent held more than 90 percent of those assets.69 Unionized workers in the past may have been able to appropriate some of the profits from the exercise of market power, but with the decline of private-sector unionization, this possibility now has limited practical importance.

Whether economy-wide harms arise from slowed economic growth or increased inequality, the extent to which markets are competitive is far from the only determinant of economy-wide productivity, growth, and inequality. While the economic literature has yet to measure successfully the magnitude with which increasing market power has contributed to the post-1970s slowdown in the rate of U.S. productivity growth or the rise in inequality,70 it is nonetheless evident that market power retards growth and enhances inequality—making it plausible that widening market power over the same period has contributed to these adverse economy-wide trends.