{
  "title": "How to Keep Corporate Power in Check",
  "publication": "IMF Blog, April 3, 2019",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2019/04/03/blog-weo-ch2-how-to-keep-corporate-power-in-check",
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  "summary": "Study uses data for nearly 1 million companies from 27 advanced and emerging market economies since the early 2000s.",
  "sections": [
    {
      "heading": "Research scope and central question",
      "content": "- Study uses data for nearly 1 million companies from 27 advanced and emerging market economies since the early 2000s.\n- Central question: Are concerns that rising power of big successful companies is behind sluggish economic growth and rising income inequality justified?"
    },
    {
      "heading": "Rise in market power",
      "content": "- Preferred metric: price markup — how much a company charges compared with how much it costs to produce, expressed as a ratio.\n- Findings on markups:\n  - Firms’ average markup has increased by close to 8 percent in advanced economies since 2000.\n  - Firms’ average markup has increased by less than 2 percent in the emerging economies covered by the analysis.\n  - Increase has taken place in most industries, largest among nonmanufacturing companies and in those that use digital technologies most intensely.\n  - Within industries, higher markups have been concentrated among a small fraction of companies.\n  - Companies with the highest markups (in the top 10 percent) raised theirs by over 30 percent since 2000, while markups have been largely flat among the remaining 90 percent.\n- Characteristics of high-markup companies:\n  - On average about 50 percent more profitable than others.\n  - On average over 30 percent more productive than others.\n  - On average use 30 percent more intangible assets (like patents or software) than others.\n  - Most are rather small (can dominate niche markets), but the larger ones in the group account for most of the group’s total sales.\n- Underlying forces:\n  - “Winner-takes-most” dynamic: more productive and innovative companies exploit proprietary intangible assets, network effects, and economies of scale.\n  - In the United States, high-markup companies have also expanded in size relative to low-markup counterparts, contributing to a larger increase in aggregate markups compared with Europe."
    },
    {
      "heading": "Worrisome macroeconomic and distributional trends",
      "content": "- Investment and growth:\n  - Rising markups have contributed to some reduction in companies’ investment.\n  - Mechanism: higher market power → charge higher price and reduce output → reduce demand for capital → reduce investment.\n  - Effect was large for companies whose markups increased the most, but more moderate for the group of advanced economies.\n  - Counterfactual estimates: if markups had remained at their 2000 levels, the stock of capital goods today would be on average about 3 percent higher and GDP about 1 percent higher.\n  - By reducing investment, rising market power weakened aggregate demand and slightly amplified the impact of the 2008 financial crisis.\n- Labor share and inequality:\n  - Increased market power since 2000 has accounted for at least 10 percent of the overall decline (0.2 out of 2 percentage points) in the share of national income paid to workers in advanced economies.\n  - This has contributed to greater earnings inequality between workers since rising capital income tends to mostly benefit high-income individuals."
    },
    {
      "heading": "Policies to strengthen competition (policy recommendations)",
      "content": "- Overarching policy goal: ensure a level playing field among all companies, including possible new ones, particularly in nonmanufacturing industries where markups have increased the most.\n- Recommended actions:\n  - Lower domestic barriers to entry (for example, by reducing administrative burdens on start-ups).\n  - Reduce barriers to trade and foreign direct investment in services.\n  - Strengthen some features of competition law and policies—such as the role of market examinations.\n  - Reform corporate taxes so as to tax the excess returns on capital derived from market power.\n  - Ensure that intellectual property rights encourage groundbreaking innovations more than incremental ones.\n- Rationale for action:\n  - Macro effects so far have been modest but could become increasingly negative if left unchecked (further declines in investment and labor income share, and potential stifling of innovation beyond a threshold).\n  - Technological forces driving market power do not justify policy inaction; weakening pro-competition policies could amplify winner-takes-most dynamics.\n  - Dominant companies that achieved market position through innovation may try to entrench positions by erecting barriers to entry, such as high customer switching costs.\n\nFederico Díez, Romain Duval — April 3, 2019 — How to Keep Corporate Power in Check\n\n---\n\n\n References\n\n- Chapter 2 of the April World Economic Outlook\n- https://www.imf.org/wp-content/uploads/2019/04/weoch2-1.png\n- https://www.imf.org/wp-content/uploads/2019/04/weoch2-2.png\n- https://www.imf.org/wp-content/uploads/2019/04/weoch2-3.png\n\nSource: https://www.imf.org/en/blogs/articles/2019/04/03/blog-weo-ch2-how-to-keep-corporate-power-in-check"
    }
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    "Authors: Federico Dez, Romain Duval",
    "Published: April 3, 2019",
    "Study uses data for nearly 1 million companies from 27 advanced and emerging market economies since the early 2000s.",
    "Central question: Are concerns that rising power of big successful companies is behind sluggish economic growth and rising income inequality justified?",
    "Preferred metric: price markup — how much a company charges compared with how much it costs to produce, expressed as a ratio.",
    "Findings on markups:",
    "Characteristics of high-markup companies:",
    "Underlying forces:",
    "Investment and growth:",
    "Labor share and inequality:",
    "Overarching policy goal: ensure a level playing field among all companies, including possible new ones, particularly in nonmanufacturing industries where markups have increased the most.",
    "Recommended actions:",
    "Rationale for action:",
    "[Chapter 2 of the April World Economic Outlook](https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019)",
    "[https://www.imf.org/wp-content/uploads/2019/04/weoch2-1.png](https://www.imf.org/wp-content/uploads/2019/04/weoch2-1.png)",
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    "[https://www.imf.org/wp-content/uploads/2019/04/weoch2-3.png](https://www.imf.org/wp-content/uploads/2019/04/weoch2-3.png)"
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