Taming Market Power Could (also) Help Monetary Policy

IMF Blog, July 21, 2021

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New IMF staff research finds ever larger and more powerful companies are making monetary policy a less potent tool for managing the economy in advanced economies, all else equal.
Market power has risen in many advanced economies and emerging market countries in recent years, as seen in price markups, concentration, or profits.
Recent IMF work finds that global price markups have increased by more than 30 percent, on average, across listed firms in advanced economies since 1980, and twice as fast in digital sectors.
The COVID-19 recession is likely to amplify these trends, as large corporations are expected to gain market share vis-à-vis small businesses, which are at greater risk of insolvency.

Firms with greater market power respond less to monetary policy actions, possibly because of their bigger profits and larger cash buffers.
Examples of large cash buffers (exact figures preserved from the source):
- As of March 2021, Apple had over $200 billion in cash and investment in marketable securities.
- As of March 2021, Alphabet had over $150 billion in cash and investment in marketable securities.
Mechanisms suggested:
- Larger profits and cash cushions make high-markup firms less sensitive to changes in external financing conditions triggered by central bank actions.
- High-markup firms may rely less on funding sources (such as bank credit) whose conditions respond swiftly to monetary policy.
- Low-markup, younger, credit-constrained firms are much more responsive to monetary policy actions than older, larger, higher-markup corporations.
Quantitative evidence:
- Using data for the United States and a panel of 14 advanced economies, high-markup firms respond a lot less to a monetary policy shock—an unexpected change in the policy rate—than the average firm.
- In the US, a 100 basis point increase in the policy rate causes a low-markup firm to cut sales by about 2 percent after four quarters, while a high-markup firm barely reduces its sales.
- Results for the panel of advanced countries are qualitatively similar.

Reduced monetary policy potency:
- Excessive market power can hamper central banks’ ability to stimulate economic activity during recessions and to cool it during expansions.
- If monetary policy is less powerful, central banks could try using more of it (for example, easing more aggressively), but this may be constrained by the effective lower bound on interest rates and limits to quantitative easing (including financial stability concerns from very large and persistent asset purchases).
- Conversely, if inflationary pressures become persistent, central banks may need to tighten monetary policy more aggressively in economies with greater market power, all else equal—hitting lower-markup firms and more competitive industries disproportionately and possibly putting the recovery at risk.
Offsetting effects:
- Market power may dampen the passthrough from higher input costs to output and inflation, reducing the response of inflation and output to a wide range of macroeconomic shocks beyond just monetary policy shocks.

Reforms to increase competition in advanced economies are recommended to strengthen monetary policy transmission and support growth and inclusiveness.
High-priority actions for competition law and policy frameworks include (jurisdiction-dependent):
- Tighter merger control, particularly concerning dominant firms.
- Stronger enforcement of abuse of dominance provisions.
- Greater reliance on market investigations.
- More specific measures to cope with the fast-changing digital economy.
Broader benefits of curbing corporate market power:
- Direct support to recovery via stimulating investment, innovation, and wage growth.
- Indirect support by making monetary policy more powerful.

Source: Taming Market Power Could (also) Help Monetary Policy — IMF blog, July 21, 2021