Economist Ali Yurukoglu has some encouraging news for anyone who fears that an overconcentration of corporate power is hurting the U.S. economy, stifling innovation, and harming consumers: Dig deep into the data, and you’ll see that competition is, in fact, alive and well.
Throughout the Biden administration, government officials and lawmakers on both sides of the aisle have embraced a narrative of declining competition and consumer welfare. That storyline has been driven by a shift in economic thinking that helped spur an aggressive approach to antitrust enforcement by the Federal Trade Commission and the Department of Justice: Since 2020, regulators have brought a slew of cases against alleged monopolists, including Big Tech behemoths such as Google, Apple, and Amazon.
But Yurukoglu, a professor of economics at Stanford Graduate School of Business, says the “competition-in-decline hypothesis” is misleading. As he and Carl Shapiro, a professor at the University of California, Berkeley, argue in a forthcoming paper in the Journal of Political Economy: Microeconomics, a more careful look at the evidence supports the more optimistically titled “competition-in-action hypothesis,” which posits that most U.S. firms aren’t acquiring market power through anticompetitive means but by outperforming their rivals in ways that benefit consumers.
Competing Narratives
Part of the reason policymakers are misreading the competitive landscape, Yurukoglu suggests, is their overreliance on a particular body of economic literature. Much of the evidence for declining competition comes from “at-scale” studies. Unlike industry-specific studies, which examine narrowly defined markets such as cereals or search engines, at-scale studies consider extremely broad ones.
While Yurukoglu believes at-scale studies have their place — “we should be doing both,” he says — the data they use isn’t granular enough to draw accurate conclusions about concentration or the extent to which one or more firms dominate an industry or market. For example, an at-scale study of the transportation sector might not distinguish between products like cars and bicycles that don’t compete with each other.
“The hope with the at-scale approach is that you could look at many industries and make comparisons,” Yurukoglu says. “It just turns out that the data that’s readily available isn’t actually amenable to learning all that much about any of these industries.”
In addition, the numbers that at-scale studies rely upon to gauge competition can be problematic. To calculate price markups, for instance, economists must first determine the marginal cost of a product or service. Since researchers rarely have access to a company’s true marginal costs, they must estimate them through indirect means, leading to inaccuracies.
Just as significantly, at-scale studies lack sufficient detail to determine whether market concentration is rising for bad reasons (e.g., firms engaging in monopolistic behaviors and anticompetitive practices) or good ones (e.g., firms making technological advances and achieving improvements in efficiency, productivity, and quality).
For example, at-scale studies have shown an economy-wide increase in a measure known as the weighted average ratio of revenues to the cost of goods sold, a phenomenon driven mostly by revenue growth among companies with high ratios. This might have occurred because those companies consolidated market power through anticompetitive means and exploited that dominance to raise prices. But it might also have occurred because highly efficient firms with lower costs outcompeted less efficient rivals and expanded across markets.
Reviewing the literature, Yurukoglu and Shapiro make the case that there’s scant evidence of an actual decline in competition. In one striking example, they note that some commentators have viewed a rise in corporate profits over the past several decades as a sign of excessive market power. But a closer look at the data reveals that much of the rise is attributable to foreign operations rather than domestic ones. In other words, it’s the result of globalization rather than a sign that monopolies are charging American consumers higher prices just because they can.
“Such profit growth does not look like it comes from Apple charging U.S. consumers a higher price for the iPhone, for example,” Yurukoglu says. “Instead, Apple is selling iPhones around the world. It’s not monopoly behavior; it’s output-increasing behavior.”
Acquiring Minds
Proponents of the competition-in-decline hypothesis have called for stricter policing of mergers and acquisitions, arguing that the feds have been too lax in challenging deals that could raise prices and hinder innovation.
But Yurukoglu and Shapiro find that while some harmful mergers have admittedly slipped past the enforcement agencies, the record is decidedly mixed. Even in the case of Facebook’s 2012 acquisition of Instagram — “the poster child,” they write, “for those arguing that antitrust enforcers were asleep at the switch” — it’s unclear whether the deal hurt consumers.
What’s more, they contend that it’s extremely tricky to perform retrospective analyses of mergers to determine their impact on competition — largely because so many factors can influence the changes that economists observe after two companies combine.
This may be especially true in the realm of Big Tech. Critics allege that for decades the FTC and the DOJ have given the largest tech companies a free pass on acquisitions (800 over the past 30 years, with 32 weighing in at over $1 billion). But if analyzing mergers is tough, analyzing tech-sector acquisitions is even harder. “The challenge of trying to evaluate the effects of a merger is that other stuff is changing at the same time,” Yurukoglu says. “And in tech, you blink and there’s something new.”
To Yurukoglu, all this suggests that what’s needed is not a major shift in antitrust policy but rather more industry-specific research that can identify which particular markets are seeing a decline in competition and which ones are seeing competition in action — and why.
In the meantime, the picture painted by the available economic evidence is not nearly as gloomy as some of his colleagues think. In fact, he says, “it’s much rosier.”
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