## CHAPTER 2

## Source details

**Canonical URL:** [CHAPTER 2](https://www.imf.org/-/media/files/publications/weo/2019/april/english/ch2.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/weo/2019/april/english/ch2.pdf.md)
- [Structured JSON version](/-/media/files/publications/weo/2019/april/english/ch2.pdf.json)

---

### Introduction — motivation and observed macroeconomic trends
- Public debate about rising corporate power is mounting amid the rise of corporate giants and broader macroeconomic trends in advanced economies over the past three decades.
- Five worrisome macroeconomic trends identified:
  - (1) Sluggish investment despite falling borrowing costs and rising expected returns from investment, as captured by Tobin’s Q.
  - (2) A growing disconnect between a roughly stable rate of return on productive capital and a falling rate of return on safer assets, such as the bonds of governments and the healthiest firms.
  - (3) A widening gap between financial and productive wealth.
  - (4) Falling labor income shares and rising income inequality.
  - (5) The slowdown in productivity growth (Adler and others 2017).
- Rising corporate market power could contribute to these trends by reducing firms’ incentives to invest, raising shareholder asset values relative to productive capital, and mechanically reducing workers’ share of income.

### Research questions, data coverage, and measurement approach
- Core questions addressed:
  - Has corporate market power increased globally? How do trends differ across country income groups, countries, industries, and firms?
  - What might be the drivers of rising market power? Product market structure changes versus policy-driven weakening of competition?
  - What is the impact of market power on growth and income distribution—investment, innovation, labor income shares?
  - What are the policy implications for competition policy and macroeconomic policy (for example, monetary policy)?
- Data and coverage:
  - Analysis covers close to 1 million firms across 27 countries—about two-thirds advanced economies and one-third (mostly central and eastern European) emerging market economies.
  - Final cleaned data set includes more than 900,000 distinct firms.
  - Firms include publicly listed and privately held firms and typically cover at least 40 percent of total output reported in official sources in a given country and year.
  - Measures computed: markups, Lerner indices, and market concentration for narrowly defined (four-digit NACE) industries.
- Market power definitions and measurement challenges:
  - Markups: ratio of price to marginal cost (main measure used throughout); empirical estimation follows De Loecker and Warzynski (2012) and yields point estimates identified only up to a constant.
  - Economic rents/profitability: operational Lerner index (ratio of operating earnings to sales).
  - Limitations: markups may overestimate market power when fixed costs must be recouped; Lerner indices capture average (not marginal) cost wedges and can be volatile; market concentration measures require careful interpretation.

### Aggregate market power trends (2000–15)
- All available indicators point to a moderate increase in aggregate market power since 2000.
- Firm-revenue-weighted average markup increased by 6 percent during 2000–15.
- In level terms, the average markup rose from about 1.28 in 2000 to 1.36 in 2015.
- Average profitability (Lerner index) also increased throughout the sample period; market concentration increased to a lesser extent.
- Heterogeneity across country groups:
  - Advanced economies: average markup rose by about 7.7 percent during 2000–15.
  - Emerging market economies in the sample: average markup rose by about 1.8 percent during 2000–15.
- Markup increases are fairly broad based across countries and industries but concentrated in nonmanufacturing industries.
- A small fraction of firms with large markup increases is a key contributor to aggregate markup rises; in the United States these high-markup firms also gained market share during 2000–15.

### Evolution of markups — industry and firm patterns
- Nearly two-thirds of the country-industry pairs in the sample show markup increases.
- The largest markup increases are among nonmanufacturing industries and in industries that use digital technologies most intensively; the average markup across manufacturing industries has been mostly flat.
- Markup increases concentrated in advanced economies and were significantly larger in the United States (twice as large as in the average advanced economy).
- Decomposition (Melitz-Polanec):
  - Two-thirds of the overall markup increase accounted for by incumbent firms (intensive margin); remainder by net entry of new firms (extensive margin).
  - Within incumbents, the rise in markups reflects primarily an increase within firms rather than reallocation of market shares away from low-markup toward high-markup firms (except in the United States, where reallocation played a larger role).
- Uneven distribution:
  - Firms in the top decile of the markup distribution increased their (weighted) average markup by more than 30 percent, while the remaining nine deciles report a (weighted) average increase of just 2 percent.
  - Most high-markup firms are small (in the bottom half of the size distribution), but the larger firms within the top decile account for the vast majority of the group’s total revenue.
  - Performance differentials (top decile versus rest): about 50 percent more profitable (Lerner); more than 30 percent more productive (TFP); more than 30 percent more intensive in use of intangible assets.

### Innovation effects
- Empirical approach:
  - Innovation proxied by patents; regressions relate patenting to lagged markups and markup squared to test for a hump-shaped relationship; instrument is median markup of other firms in same country-industry-year.
- Hump-shaped relationship:
  - Higher markups increase patents when markup levels are low, but reduce patents when markups are high.
  - Industry-level: more than 80 percent of observations were located before the turning point over the sample.
  - The fraction of industry observations beyond the turning point increased from roughly 15 percent in 2000 to 21 percent in 2015.
  - Firm-level: share of firms beyond the turning point was about 7.5 percent in 2015, and that share increased by 50 percent during the sample period.
- Projection example:
  - If markups rose in 2015–30 at the same rate as in 2000–15, the predicted patent stock of high-markup firms would be almost 4 percent lower than if markups were stable; the overall patent stock would be more than 0.3 percent lower.

### Investment effects — firm-level and aggregate counterfactuals
- Context: Private fixed investment declined by about 25 percent, on average, across advanced economies since the global financial crisis, compared with its precrisis trend.
- Theoretical channel: higher market power lowers demand for capital and reduces investment, potentially lowering the capital-to-output ratio.
- Firm-level estimate: a 10 percentage point increase in a firm’s markup is associated with a statistically significant 0.6 percentage point decrease in its physical capital investment rate.
- Alternative estimate: a 0.4 percentage point decrease in the physical capital investment rate is associated with the average increase in firms’ markups.
- Top-decile firms: the average increase in firms’ markups is associated with a decrease in the investment rate of 2 percentage points.
- Aggregate counterfactual (2000 markups held constant):
  - For the group of advanced economies in the sample, a 3 percent larger physical capital stock in 2015 in the average advanced economy under constant markups.
  - That would have translated into an output gain of about 1 percent, assuming the applied elasticity.

### International spillovers through supply chains
- Higher domestic firm markups can reduce foreign demand for inputs (demand channel) and raise prices of intermediate goods sold to foreign firms (input channel).
- Empirical example: For a hypothetical industry in an emerging market economy that imports 40 percent of its value added, a 10 percentage point markup increase across all its foreign suppliers is found to reduce output by 0.3 percent, all else equal.

### Model simulations — slack, interest rates, and inflation
- Rising within-firm markups modeled as a decline in substitutability between goods and services produced by different firms.
- A sustained, unexpected rise in markups is inflationary as firms raise prices, but also prompts firms to cut output and investment.
- By 2015, model simulations for the euro area and the United States as a group suggest:
  - The output gap might have been about 0.3 percentage point wider than if markups had stayed at their 2000 level.
  - Inflation might have been about 0.2 percentage point higher than if markups had stayed at their 2000 level.
  - The natural interest rate might have been about 10 basis points lower than if markups had stayed at their 2000 level.
- Implications: rising markups foster some economic slack and slightly lower the natural interest rate, which can deepen a recession when policy interest rates hit the effective lower bound and may modestly increase reliance on unconventional monetary policies; simulations imply only small changes in the Phillips curve to date.

### Income distribution and labor shares
- Firm-level estimate: an increase in markups of 10 percentage points is associated with a statistically significant 0.3 percentage point decrease in the labor share (wage bill to value added).
- Aggregated illustrative findings:
  - Average increase in firms’ markups since 2000 is associated with a 0.2 percentage point decrease in the labor share overall.
  - For firms in the top decile of the markup distribution, the average increase in firms’ markups is associated with a decrease in the labor share of 1 percentage point.
- Interpretation:
  - Rising markups have accounted for at least 10 percent of the trend decline in the labor share in the average advanced economy.
  - Without any markup increases since 2000, the average labor share across the sample of advanced economies might have been at least 0.2 percentage point higher today; this compares with an average fall in the labor share of about 2 percentage points over the past two decades.
  - Within-firm estimates likely understate aggregate effects where reallocation toward high-markup, low-labor-share firms occurred (for example, the United States).

### Quantitative summary of key magnitudes
- Firm-revenue-weighted average markup increased by 6 percent during 2000–15.
- Average markup: about 1.28 in 2000 → 1.36 in 2015.
- Advanced economies: markup rose by about 7.7 percent during 2000–15.
- Emerging market economies in sample: markup rose by about 1.8 percent during 2000–15.
- Top-decile firms increased average markup by more than 30 percent; other deciles increased by 2 percent on average.
- Top-decile firms: about 50 percent more profitable (Lerner); more than 30 percent more productive (TFP); more than 30 percent more intensive in intangibles than other firms.
- Industry observations beyond innovation turning point: roughly 15 percent in 2000 → 21 percent in 2015.
- Firm observations beyond innovation turning point: about 7.5 percent in 2015 (up 50 percent over the sample).
- 10 percentage point markup increase → 0.6 percentage point decrease in firm physical capital investment rate (firm-level estimate).
- Average association: 0.4 percentage point decrease in the physical capital investment rate.
- Top-decile firms: 2 percentage points decrease in investment rate (association).
- Keeping markups at 2000 levels implies about 3 percent larger physical capital stock and about 1 percent higher output in the average advanced economy by 2015.
- Private fixed investment is down about 25 percent across advanced economies relative to precrisis trend since the global financial crisis.
- International input-channel example: 10 percentage point markup increase across foreign suppliers → 0.3 percent reduction in output for an industry importing 40 percent of value added.
- By 2015, trend rise in markups associated with: 0.3 percentage point wider output gap; 0.2 percentage point higher inflation; 10 basis points lower natural interest rate.
- 10 percentage point markup increase → 0.3 percentage point decrease in firm labor share.
- Average increase in firm markups since 2000 associated with 0.2 percentage point decrease in labor share overall; 1 percentage point decrease for top decile firms.
- Rising markups account for at least 10 percent of the trend decline in the labor share in the average advanced economy.
- Average fall in the labor share over the past two decades: about 2 percentage points.

### Policy implications and recommended agenda
- Main policy objective: keep market competition strong to limit adverse growth and distributional effects if corporate market power continues to rise.
- Recommended reforms and actions:
  - Cut domestic barriers to entry in nonmanufacturing industries (for example, administrative burdens on start-ups or regulatory protections of incumbents).
  - Liberalize trade and foreign direct investment to increase the threat of entry.
  - Strengthen competition law and policy:
    - Ensure competition authorities have ample resources to investigate mergers in detail and assess consumer benefits.
    - Empower authorities to undertake market examinations and, when anticompetitive behavior is found, enforce strong remedies, including directing firms to divest assets if necessary.
    - Consider greater attention to acquisitions by large incumbents of small—but potentially large in the future—competitors, with caution given counterfactual difficulty.
    - Adopt a dynamic perspective: larger and more persistent industry profits suggest barriers to entry and need for closer industry examination.
  - Ease obstacles to technological catch-up by lagging firms:
    - Calibrate intellectual property rights to incentivize innovation without undermining diffusion.
    - Design patent pools to facilitate use of new technologies and firm entry.
    - Adopt competition-neutral data governance regimes.
  - Corporate taxation reform to address market-power rents:
    - Move toward tax designs that exempt normal returns and focus on economic rents (for example, cash flow taxes allowing investment to be expensed, or an allowance for corporate equity).
    - Use targeted incentives, such as research and development tax credits, to encourage innovation efficiently.
    - Consider destination-based versions of these taxes to withstand profit shifting and level the playing field between large and small firms.
- Additional considerations:
  - Monitor mergers and acquisitions: empirical evidence shows M&A activity is followed by markup increases (average markup increase on the order of 1.1 percentage points; 1.2 percentage points for horizontal M&A), but detailed causal and welfare assessments are required.
  - Adapt competition policy to evolving market structures driven by intangible assets, network effects, and winner-takes-most dynamics.

*Source: Introduction, CHAPTER 2, The Rise of Corporate Market Power and Its Macroeconomic Effects, World Economic Outlook: Growth Slowdown, Precarious Recovery, International Monetary Fund | April 2019.*

### Introduction

### ch2 - Introduction

### Motivation and observed macroeconomic trends
- Public debate about rising corporate power is mounting amid the rise of corporate giants and broader macroeconomic trends in advanced economies over the past three decades.
- Five worrisome macroeconomic trends identified:
  - (1) Sluggish investment despite falling borrowing costs and rising expected returns from investment, as captured by Tobin’s Q.
  - (2) A growing disconnect between a roughly stable rate of return on productive capital and a falling rate of return on safer assets, such as the bonds of governments and the healthiest firms.
  - (3) A widening gap between financial and productive wealth.
  - (4) Falling labor income shares and rising income inequality.
  - (5) The slowdown in productivity growth (Adler and others 2017).
- Rising corporate market power could, in principle, contribute to all five trends simultaneously by reducing firms’ incentives to invest, raising shareholder asset values relative to productive capital, and mechanically reducing workers’ share of income.

### Research questions and scope
- Core questions addressed:
  - Has corporate market power increased globally? How do trends differ across country income groups, countries, industries, and firms?
  - What might be the drivers of rising market power? Roles of product market structure changes (digital economy) versus policy-driven weakening of competition?
  - What is the impact of market power on growth and income distribution—investment, innovation, labor income shares?
  - What are the policy implications for competition policy and macroeconomic policy (for example, monetary policy)?
- Data and coverage:
  - Analysis covers close to 1 million firms across 27 countries—about two-thirds advanced economies and one-third (mostly central and eastern European) emerging market economies.
  - Final cleaned data set includes more than 900,000 distinct firms.
  - Firms include publicly listed and privately held firms and typically cover at least 40 percent of total output reported in official sources in a given country and year.
  - Measures computed: markups, Lerner indices, and market concentration for narrowly defined (four-digit NACE) industries.

### Measurement approach and challenges
- Two main definitions of market power considered:
  - Markups: ratio of price to marginal cost (main measure used throughout).
  - Economic rents/profitability (operational Lerner index): ratio of operating earnings to sales.
- Limitations noted:
  - Markups may overestimate market power when fixed costs must be recouped.
  - Lerner indices capture average (not marginal) cost wedges and can be volatile.
  - Market concentration measures require careful interpretation and can be misleading.
- Empirical markup estimation follows De Loecker and Warzynski (2012); point estimates are identified only up to a constant and should be seen as illustrative.

### Aggregate market power trends (2000–15)
- All available indicators point to a moderate increase in aggregate market power since 2000.
- Firm-revenue-weighted average markup increased by 6 percent during 2000–15.
- In level terms, the average markup rose from about 1.28 (markup of the price over marginal cost of 28 percent) in 2000 to 1.36 in 2015.
- Average profitability (Lerner index) also increased throughout the sample period.
- Market concentration has increased to a lesser extent.
- Heterogeneity across country groups:
  - Advanced economies: average markup rose by about 7.7 percent during 2000–15.
  - Emerging market economies in the sample: average markup rose by about 1.8 percent during 2000–15.
- Markup increases are fairly broad based across countries and industries but concentrated in nonmanufacturing industries.
- A key contributor to rising markups is an increase in markups charged by a small fraction of firms:
  - Most of these firms are rather small, but the larger ones in the group account for the vast majority of the group’s total revenue.
  - High-markup firms tend to have higher productivity and are more likely to invest in intangible assets (patents, software).
  - In the United States, high-markup firms also gained market share during 2000–15, contributing to a larger aggregate markup increase relative to other countries.

### Drivers and interpretation
- Tentative interpretation:
  - Changes in the structure of product markets—winner-takes-most dynamics driven by intangible assets, network effects, economies of scale, and managerial/technical skills—likely underpin at least some of the overall rise in market power.
  - The broad-based nature of markup increases and the role of a small fraction of firms point more toward common structural forces than solely policy-driven weakening of competition.
  - Weak pro-competition policies can magnify winner-takes-most dynamics; dominant firms may attempt to entrench positions by erecting barriers to entry.

### Macroeconomic effects
- Impact on growth:
  - Higher markups have been associated with somewhat weaker investment despite higher profits and Tobin’s Q.
  - Empirical estimates suggest that because of weaker investment linked to higher markups, output would be about 1 percent higher today in the average advanced economy if markups had not increased since 2000—ignoring technological or organizational improvements that may have enabled some firms to raise markups.
  - Through the investment channel, rising market power may have slightly reduced the natural (real) rate of interest, making the effective lower bound more binding.
  - Effects on innovation are ambiguous: possibly marginally positive so far but could turn increasingly negative if high-markup firms further increase market power.
- Spillovers:
  - Higher markups can spill over to other domestic and foreign firms through supply-chain links.
  - Evidence suggests higher markups among foreign suppliers are associated with slightly lower output among emerging market firms that purchase inputs in less competitive markets.
- Distributional effects:
  - Rising market power throughout 2000–15 reduced labor shares of income by a minimum of 0.2 percentage point—about 10 percent of the overall decline across advanced economies.
  - This lower-bound estimate includes only the within-firm impact of rising markups and ignores reallocation effects (where high-markup, low-labor-share firms gain market share), as well as possible contributions to rising wage and wealth inequality.

### Policy implications and recommendations
- With risks of adverse growth and income distribution effects from rising corporate market power, policymakers should keep market competition strong.
- Helpful reforms include:
  - Cutting domestic barriers to entry in nonmanufacturing industries.
  - Liberalizing trade and foreign direct investment.
  - Adjusting competition policy frameworks to deal with emerging issues as needed.
  - Easing obstacles to technological catchup by lagging firms.
  - Shifting the burden of corporate taxation onto economic rent.
- Additional policy questions explored in the chapter include implications for monetary policy and whether market power affected inflation, interest rates, and output dynamics in advanced economies after the 2008–09 global financial crisis.

*Source: Introduction, CHAPTER 2, The Rise of Corporate Market Power and Its Macroeconomic Effects, World Economic Outlook: Growth Slowdown, Precarious Recovery, International Monetary Fund | April 2019.*

### 1. Markups

### Markups

### Evolution of Market Power
- All measures point toward a moderate increase in market power over time: higher markups, higher profitability, and, to a lesser extent, higher concentration.
- Markup calculations are based on the approach of De Loecker and Warzynski (2012) using the Orbis database; regressions include country fixed effects and are weighted by firms’ operating revenue.
- Profitability measure: Lerner index, computed as the weighted average of firms’ ratio of earnings before taxes to revenue.
- Concentration measure: ratio of sales of top four to top 20 firms within each country-sector bin; aggregation uses simple averages across sectors within a country and then the median across countries.
- Markup increases have been rather broad based across industries but differ in magnitude:
  - Nearly two-thirds of the country-industry pairs in the sample show markup increases.
  - The largest markup increases are among nonmanufacturing industries and in industries that use digital technologies most intensively.
  - The average markup across manufacturing industries has been mostly flat.
- Country heterogeneity:
  - Markup increases are concentrated in advanced economies; markups in the selected emerging markets covered by the analysis have risen only slightly.
  - Markup increases were significantly larger in the United States (twice as large as in the average advanced economy).
  - For the United States, the reallocation component accounted for about 80 percent of the rise in the aggregate markup.

### Distribution across Firms and Decomposition
- Over the full sample, markup increases within incumbent firms accounted for the full increase in the aggregate markup (large positive “within” component), with new firms entering with higher markups contributing about one-third of the overall rise (the “entry” component).
- Decomposition findings (Melitz-Polanec):
  - Two-thirds of the overall markup increase can be accounted for by incumbent firms (intensive margin) and the remainder by the net entry of new firms (extensive margin).
  - Among incumbents, the rise in markups reflects primarily an increase within firms rather than reallocation of market shares away from low-markup toward high-markup firms (except in the United States).
- Rise in markups is highly uneven:
  - Firms in the top decile of the markup distribution increased their (weighted) average markup by more than 30 percent, while the remaining nine deciles report a (weighted) average increase of just 2 percent.
  - Most high-markup firms are small (in the bottom half of the size distribution), but the larger firms within the top decile account for the vast majority of the group’s total revenue.
  - Performance differentials (top decile versus rest):
    - About 50 percent more profitable (Lerner).
    - More than 30 percent more productive (TFP).
    - More than 30 percent more intensive in use of intangible assets.

### Macroeconomic Implications — Innovation
- Empirical approach:
  - Innovation proxied by patents; regressions relate patenting activity to lagged markups and markup squared to test for a hump-shaped relationship.
  - Controls include firm size, firm fixed effects, and either country-industry-year fixed effects or country-year and industry-year fixed effects.
  - Instrumental variable: median markup of all other firms in the same country-industry-year.
- Hump-shaped relationship between markups and patents:
  - Strong and robust evidence that higher markups increase patents when markup levels are low, but have the opposite effect when markups are high.
  - At the industry level, more than 80 percent of observations were located before the turning point over the sample period.
  - The fraction of industry observations located beyond the turning point increased from roughly 15 percent in 2000 to 21 percent in 2015.
  - At the firm level, the share of firms located beyond the turning point was about 7.5 percent in 2015, and that share increased by 50 percent during the sample period.
- Implications for future innovation:
  - While past markup increases were estimated to have had a marginally positive effect on patents overall, continued markup increases could lead to declining patenting—mostly driven by firms in the top decile.
  - Example projection based on empirical estimates: if markups rose in 2015–30 at the same rate as in 2000–15,
    - The predicted patent stock of high-markup firms would be almost 4 percent lower than if markups were stable.
    - The overall patent stock would be more than 0.3 percent lower.

### Macroeconomic Implications — Investment
- Context:
  - Private fixed investment declined by about 25 percent, on average, across advanced economies since the global financial crisis, compared with its precrisis trend.
- Theoretical channel:
  - Higher market power allows firms to raise prices and reduce output at a given marginal cost, which lowers demand for capital and reduces investment; over the long term, this can lower the capital-to-output ratio.
- Empirical finding on investment:
  - Firm-level analysis linking net investment rate in tangible assets to lagged markup, with instrumental variables and rich fixed effects.
  - Main estimate: a 10 percentage point increase in a firm’s markup is associated with a statistically significant 0.6 percentage point decrease in its physical capital investment rate.
- Aggregate counterfactual exercise:
  - Simulating firms’ net tangible asset stocks during 2000–15 with markups held at their 2000 levels yields:
    - For the group of advanced economies in the sample, a 3 percent larger physical capital stock in 2015 in the average advanced economy under constant markups.
    - That would have translated into an output gain of about 1 percent, assuming the applied elasticity.

### Summary of Key Quantitative Findings
- Top-decile firms increased average markup by more than 30 percent since 2000; other deciles increased by 2 percent on average.
- Top-decile firms are, on average, about 50 percent more profitable, more than 30 percent more productive, and more than 30 percent more intensive in intangibles than other firms.
- Industry observations beyond the innovation turning point: roughly 15 percent in 2000 → 21 percent in 2015.
- Firm observations beyond the innovation turning point: about 7.5 percent in 2015 (up 50 percent over the sample).
- If markups rise by 10 percentage points, firm physical capital investment rate falls by 0.6 percentage points.
- Keeping markups at 2000 levels would imply about 3 percent larger physical capital stock and about 1 percent higher output in the average advanced economy by 2015.
- Private fixed investment is down about 25 percent across advanced economies relative to precrisis trend since the global financial crisis.

*Source: ch2 - 1. Markups (PDF chapter), International Monetary Fund | April 2019*

### 0.4 percentage point decrease in the physical capital investment rate. For the firms

### ch2 - 0.4 percentage point decrease in the physical capital investment rate. For the firms

### Effects on investment and physical capital
- A 0.4 percentage point decrease in the physical capital investment rate is associated with the average increase in firms’ markups.
- For firms in the top decile of the markup distribution, the average increase in firms’ markups is associated with a decrease in the investment rate of 2 percentage points.
- The predicted loss in physical capital from the empirical within-firm analysis is somewhat below, but close to, that obtained from the macroeconomic model simulation described in the chapter.
- Additional analysis indicates between-firm reallocation effects on capital have typically been small.

### International spillovers through supply chains
- Higher domestic firm markups can reduce foreign demand for inputs (demand channel) and can raise prices of intermediate goods sold to foreign firms (input channel).
- Empirical regressions of country-industry value added on weighted foreign buyers’ markups and weighted foreign suppliers’ markups (controlling for domestic links and fixed effects) point to moderate negative international spillovers through the input channel.
- Example: For a hypothetical industry in an emerging market economy that imports 40 percent of its value added, a 10 percentage point markup increase across all its foreign suppliers is found to reduce output by 0.3 percent, all else equal.

### Model simulations: economic slack, interest rates, and inflation
- Rising within-firm markups are modeled as a decline in substitutability between goods and services produced by different firms.
- A sustained, unexpected rise in markups is inflationary as firms raise prices, but an offsetting contractionary effect arises because more inelastic demand prompts firms to cut output and investment.
- By 2015, for the euro area and the United States as a group, model simulations suggest:
  - The output gap might have been about 0.3 percentage point wider than if markups had stayed at their 2000 level.
  - Inflation might have been about 0.2 percentage point higher than if markups had stayed at their 2000 level.
  - The natural interest rate might have been about 10 basis points lower than if markups had stayed at their 2000 level.
- The model-based focus on weaker investment is qualitatively and quantitatively consistent with the empirical results showing higher markups’ harm on investment and broadly neutral effect on innovation so far.
- Because rising markups foster some economic slack and slightly lower the natural interest rate, they can deepen a recession when policy interest rates hit the effective lower bound, potentially amplifying recessions or increasing reliance on unconventional monetary policies.
- Simulations imply only small changes in the responsiveness of inflation to economic conditions (the Phillips curve), because the increase in markups has not been large enough to make a major difference to date.

### Income distribution and labor shares
- Empirical firm-level regressions (markup instrumented; rich controls and fixed effects) find:
  - An increase in markups of 10 percentage points is associated with a statistically significant 0.3 percentage point decrease in the labor share (measured as the ratio of the firm’s wage bill to value added).
- Illustrative aggregated findings:
  - For the overall sample, the average increase in firms’ markups since 2000 is associated with a 0.2 percentage point decrease in the labor share.
  - For firms in the top decile of the markup distribution, the average increase in firms’ markups is associated with a decrease in the labor share of 1 percentage point.
- Taken at face value, rising markups have accounted for at least 10 percent of the trend decline in the labor share in the average advanced economy.
- Without any markup increases since 2000, the average labor share across the sample of advanced economies might have been at least 0.2 percentage point higher today; this compares with an average fall in the labor share of about 2 percentage points over the past two decades.
- The within-firm empirical estimates likely understate aggregate effects in countries where reallocation between firms (between-firm effects) has also played a role; for example, in the United States high-markup firms have gained market share at the expense of low-markup firms, producing a composition effect that lowers the aggregate labor share.
- The uneven rise in markups across firms may have accompanied greater earnings inequality between firms; recent evidence indicates earnings inequality between firms has been the main driver of the rise in earnings inequality in recent decades in the United States.

### Summary of key empirical magnitudes
- 0.4 percentage point decrease in the physical capital investment rate (average association).
- 2 percentage points decrease in investment rate for top decile firms (association).
- 10 percentage point markup increase → 0.3 percent reduction in output for an industry importing 40 percent of value added (international input-channel example).
- By 2015, trend rise in markups associated with: 0.3 percentage point wider output gap; 0.2 percentage point higher inflation; 10 basis points lower natural interest rate.
- 10 percentage point markup increase → 0.3 percentage point decrease in firm labor share.
- Average increase in firm markups since 2000 associated with 0.2 percentage point decrease in labor share overall; 1 percentage point decrease for top decile firms.
- Rising markups account for at least 10 percent of the trend decline in the labor share in the average advanced economy.
- Average fall in the labor share over the past two decades: about 2 percentage points.

### Policy implications and considerations
- The macroeconomic implications of the rise in market power have been modest so far but would become increasingly negative if market power of high-markup firms continues to rise: investment would weaken, innovation could slow, labor income shares could fall further, and stabilizing output in downturns could become more difficult for monetary policymakers.
- Several findings suggest technology-driven changes have underpinned at least some of the rise in market power in advanced economies (winner-takes-most dynamics, intangible assets, network effects, economies of scale).
- Other factors could magnify the impact of technological changes, including potential weakening or inadequate adaptation of competition policy (for example, in merger enforcement or exclusionary conduct).
- Empirical evidence shows mergers and acquisitions have been followed by significantly higher markups in the firm sample analyzed; whether consumer losses from such markup increases are offset by gains from economies of scale and scope or other efficiency gains remains an open question.
- A policy lesson: successful firms that achieved dominance via innovation may attempt to entrench positions by erecting barriers to entry (for example, hard-to-reproduce intangible assets); monitoring and adapting competition policy to evolving market structures may be warranted.

*Source: Chapter 2, "The Rise of Corporate Market Power and Its Macroeconomic Effects," World Economic Outlook, April 2019.*

### CHAPTER 2

### CHAPTER 2

### Rising Corporate Market Power — Policy Agenda and Remedies
- Strengthen market contestability by cutting domestic regulatory barriers to entry (such as administrative burdens on start-ups or regulatory protections of incumbents) and further openness to trade and foreign direct investment to increase the threat of entry and spur growth.
- Apply this agenda particularly to nonmanufacturing industries and to emerging market economies, where product market regulations and barriers to trade and foreign direct investment remain comparatively more stringent and competition policy enforcement weaker.
- Strengthen competition law and policy as a complement to product market deregulation:
  - Ensure competition authorities have ample resources to investigate mergers in detail and assess consumer benefits.
  - Empower authorities to undertake market examinations and, when anticompetitive behavior is found, enforce strong remedies, including directing firms to divest assets if necessary.
  - Consider whether authorities should pay greater attention to acquisitions by large incumbents of small—but potentially large in the future—competitors; exercise caution given the difficulty of establishing the counterfactual, with the argument for action increasing with the size and persistence of the incumbent’s market power.
  - Adopt a dynamic perspective: larger and more persistent industry profits suggest barriers to entry and the need for closer industry examination.
- Ease obstacles to technological catch-up by lagging firms to strengthen competition:
  - Calibrate intellectual property rights to continue incentivizing groundbreaking innovation without undermining technological diffusion.
  - Design patent pools to facilitate, rather than hinder, use of new technologies and firm entry.
  - Adopt competition-neutral data governance regimes.
- Corporate taxation reform to address market-power rents:
  - Move toward tax designs that exempt normal returns and focus on economic rents, for example via cash flow taxes (allowing investment to be expensed) or an allowance for corporate equity (a deduction equal to the normal return on equity).
  - Use targeted incentives, such as research and development tax credits, to encourage innovation efficiently.
  - Consider destination-based versions of these taxes (taxing corporate income based on location of final consumption) to withstand profit shifting by multinational firms and level the playing field between large firms (better able to shift profits) and smaller competitors.

*The Rise of Corporate Market Power and Its Macroeconomic Effects, International Monetary Fund | April 2019*

---

### Box 2.1 — Comovement between Industry Concentration and Corporate Saving (G7 listed firms)
- Key aggregate observation:
  - The average saving rate across narrowly defined (four-digit NACE) industries in Group of Seven (G7) countries comoves strongly over time with the average share of sales by the largest four firms in an industry, with a correlation coefficient of 0.8.
- Definition:
  - The corporate saving rate refers to total gross saving (undistributed gross profits) as a share of gross value added.
- Four main empirical findings (listed in source):
  - Most of the increase in aggregate corporate saving reflects higher saving by incumbent firms rather than compositional changes driven by entry, exit, or market share reallocation among incumbent firms.
  - Incumbent firms have been increasing their saving rates more in industries where concentration (or markups) has risen more.
  - Rising pretax profits (gross operating surplus) as a share of corporate value added are the main source of the increase in corporate saving in concentrating industries; despite rising profitability, firms in industries with larger increases in concentration have not significantly raised their dividends or tax payments.
  - The within-firm rise in saving has been driven by large firms, with the top 1 percent (by size) showing the largest increases.
- Empirical approach and corroboration:
  - Results hold when average firm markup is used as the measure of market concentration.
  - A panel regression using Worldscope data for 1996– 2014 estimates firm saving rate s_ijct = Grosssavings / Grossvalueadded for firm i in industry j, country c, time t, with CR4 (fraction of total sales or assets accrued to the four largest firms in an industry) and other firm controls; coefficient β1 on CR4 is positive and statistically significant.
- Possible mechanism:
  - Declining global real interest rates (and corporate tax rates) over the past couple of decades disproportionately benefit larger, less financially constrained firms that can leverage more and save disproportionately for high-return projects; when liquidity is constrained, larger firms save more for future high-return investment.

*The Rise of Corporate Market Power and Its Macroeconomic Effects, International Monetary Fund | April 2019*

---

### Box 2.2 — Effects of Mergers and Acquisitions on Market Power
- Context:
  - Global mergers and acquisitions (M&A) activity has grown steadily since 2000; the value share of horizontal deals (acquirer and target in same industry) has recovered to a pre–global financial crisis average of about one-third.
- Main empirical finding:
  - Mergers and acquisitions are followed by markup increases by acquiring firms.
- Quantitative results:
  - Ordinary least squares regressions (controlling for firm and country-industry-year fixed effects, firm size (operating revenue), total factor productivity, profitability (earned income before interest and taxes divided by total assets), and clustering standard errors at the firm level) find a sizable and statistically significant association between M&A activity and the subsequent change in a firm’s markup:
    - Average markup increase on the order of 1.1 percentage points.
    - For horizontal M&A, the average markup increase is 1.2 percentage points.
- Counterfactual test:
  - Using announced-but-withdrawn deals as a counterfactual, the estimation yields a statistically insignificant negative relationship between markups and the (counterfactual) post–M&A period for these withdrawn deals; sample size is much smaller and withdrawn deals may have specific confounding reasons.
- Caveats and policy implications:
  - More detailed analysis is required to establish causality between M&A activity and increasing markups and to assess impacts on productivity and other efficiency measures that may benefit consumers.
  - A full welfare assessment requires comparing efficiency gains (economies of scale and scope, improved quality) against potential losses from reduced competition (higher prices, lower variety or quality).

*The Rise of Corporate Market Power and Its Macroeconomic Effects, International Monetary Fund | April 2019*

### CHAPTER 2

### CHAPTER 2

### Referenced research and thematic focus
- The chapter’s bibliography centers on research related to market power, industry concentration, markups, productivity, investment, labor and product market reforms, competition policy, antitrust, and the macroeconomic implications of firm-level behavior.
- Recurring technical themes and terminologies in the cited works include: markups, market concentration, total factor productivity, product market regulation, labor share, entry costs, monopoly power, patent pools, sticky prices, and the secular stagnation of investment.

### Notable cited works (selected entries preserved exactly as in source)
- Duval, Romain, and Davide Furceri. 2018. “The Effects of Labor and Product Market Reforms: The Role of Macroeconomic Conditions and Policies.” IMF Economic Review 66 (1): 31−69.
- Edmond, Chris, Virgiliu Midrigan, and Daniel Yi Xu. 2018. “How Costly Are Markups?” NBER Working Paper 24800, National Bureau of Economic Research, Cambridge, MA.
- Eggertsson, Gauti B., Jacob A. Robbins, and Ella Getz Wold. 2018. “Kaldor and Piketty’s Facts: The Rise of Monopoly Power in the United States.” NBER Working Paper 24287, National Bureau of Economic Research, Cambridge, MA.
- Gutiérrez, German, and Thomas Philippon. 2017. “Investment-less Growth: An Empirical Investigation.” Brookings Papers on Economic Activity, Washington, DC.
- Grullon, Gustavo, Yelena Larkin, and Roni Michaely. 2018. “Are US Industries Becoming More Concentrated?” Unpublished.
- Kehrig, Matthias, and Nicolas Vincent. 2018. “The Micro-Level Anatomy of the Labor Share Decline.” NBER Working Paper 25275, National Bureau of Economic Research, Cambridge, MA.
- Khan, Lina. 2017. “Amazon’s Antitrust Paradox.” Yale Law Journal 126 (3): 710−804.
- Rossi-Hansberg, Esteban, Pierre-Daniel Sarte, and Nicholas Trachter. 2018. “Diverging Trends in National and Local Concentration.” CEPR Discussion Paper 13174, Center for Economic and Policy Research, Washington, DC.
- Shapiro, Carl. 2012. “Competition and Innovation: Did Arrow Hit the Bull’s Eye?” in The Rate and Direction of Inventive Activity Revisited, edited by Josh Lerner and Scott Stern. Chicago: University of Chicago Press.
- Song, Jae, David Price, Fatih Guvenen, Nicholas Bloom, and Till Von Wachter. 2019. “Firming Up Inequality.” Quarterly Journal of Economics 134 (1): 1–50.
- World Bank (WB). 2017. A Step Ahead: Competition Policy for Shared Prosperity and Inclusive Growth. Washington, DC: World Bank.
- International Monetary Fund (IMF). 2017. External Sector Report. Washington, DC.

### Bibliographic and methodological emphases reflected by citations
- Empirical approaches at firm and industry levels: use of ORBIS-based firm-level productivity measures, firm-level decomposition techniques, and narrative databases of reforms.
- Policy-oriented analyses: competition policy and antitrust debates, optimal taxation of monopoly, and product market regulation updates.
- Macroeconomic linkages: studies connecting market power and concentration to investment trends, labor share dynamics, price setting (sticky prices), and broader distributional outcomes.

*CHAPTER 2 — ThE RISE OF CORPORaTE MaRKET POWER aND ITS MaCROECONOMIC EFFECTS. International Monetary Fund | April 2019*

---


_Source: https://www.imf.org/-/media/files/publications/weo/2019/april/english/ch2.pdf_