The Rise of Powerful Companies

IMF Blog, June 6, 2019

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Chart of the Week from the April World Economic Outlook analyzes nearly 1 million companies from 27 advanced and emerging market economies since the early 2000s.
Firms’ average price markup—the ratio of a company’s product price to its production cost—has increased moderately.
Across advanced economies, average markups increased by 8 percent since 2000.
Across the emerging economies covered by the analysis, average markups increased by less than 2 percent since 2000.
The overall increase in market power has taken place in most industries but has been driven by a small fraction of companies.

Companies with the highest markups (those in the top 10 percent) raised theirs by over 30 percent since 2000.
Markups have been largely flat among the remaining 90 percent of companies.
These high-markup companies vary in size but, on average:
- are about 50 percent more profitable than others;
- are over 30 percent more productive than others;
- use 30 percent more intangible assets, like patents or software, than others.
Factors helping more productive and innovative companies extend market power include:
- proprietary intangible assets;
- network effects (when a product or service gains additional value as more people use it);
- economies of scale (reduced costs per unit as output increases).

People are concerned that the rising power of big successful companies could lower capital investment, weaken productivity, and reduce people’s take-home pay.
While rising corporate market power has had a fairly limited negative economic impact so far, if left unchecked, it could take a bigger toll on growth and people’s income.

Keep market competition strong by ensuring a level playing field among all companies, including new ones.
Lower domestic barriers to entry, for example, by reducing administrative burdens on start-ups.
Reduce barriers to trade and foreign direct investment, especially in services.
Strengthen features of competition law and policies, such as the role of market examinations.
Reform corporate taxes to tax the excess returns on capital derived from market power.
Ensure that intellectual property rights encourage groundbreaking innovations more than incremental ones.

The Rise of Powerful Companies — The Editors, June 6, 2019