Rising Market Power—A Threat to the Recovery?
IMF Blog, March 15, 2021
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- Authors: Kristalina Georgieva, Federico J Dez, Romain Duval, Daniel Schwarz
- Published: March 15, 2021
Overview
- Publication: March 15, 2021
- Authors: Kristalina Georgieva, Federico J. Díez, Romain Duval, Daniel Schwarz
- Central concern: The COVID-19 crisis has deepened the market-power advantages of dominant firms while smaller rivals exit, posing risks to medium-term growth, innovation, investment, and the recovery.
Evidence of rising market power
- New IMF research finds key indicators of market power are on the rise, including:
- Price markup over marginal cost.
- Revenue concentration among the four biggest players in a sector.
- Pandemic-related estimate:
- Concentration could now increase in advanced economies by at least as much as it did in the fifteen years to end of 2015.
- Long-run trends:
- Global price markups have risen by more than 30 percent, on average, across listed firms in advanced economies since 1980.
- In the past 20 years, markup increases in the digital sector have been twice as steep as economy-wide increases.
- Persistence of high markups:
- Companies with the highest markups in a given year (top decile) have an almost 85 percent chance of remaining a high-markup firm the following year—some 10 percentage points higher than during the “New Economy” era of the 1990s.
- Sectoral winners:
- Even in industries that benefited from the crisis, such as the digital sector, dominant players are among the biggest winners.
Causes and transmission channels
- Pandemic effects:
- The crisis hit small and medium enterprises especially hard, causing massive job losses and firm exits that strengthen incumbents.
- Structural forces:
- Network effects and economies of scale and scope bolster incumbent advantages, especially for big tech firms.
- Mergers and acquisitions (M&A):
- Rising M&A activity—especially by dominant players—can yield cost savings and better products but can also weaken innovation incentives and increase pricing power.
- IMF analysis shows M&A by dominant firms contributes to an industry-wide decline in business dynamism, reducing growth and research and development spending across competitors.
- Labor-market effects:
- Some firms hold power over wages, paying workers less than warranted by marginal productivity.
- Non-compete clauses and ‘no poaching’ pacts can impede worker mobility and wage growth, notably for low-skilled workers.
Policy implications and recommendations (five priorities)
- 1) Strengthen merger-control enforcement
- Competition authorities should be increasingly vigilant when enforcing merger control.
- Review criteria should cover acquisitions of small players that may grow to compete with dominant firms.
- Example: Germany and Austria recently introduced thresholds based on the deal price, in addition to those based on the target’s turnover.
- Evaluations of past merger decisions could improve enforcement effectiveness.
- 2) Enforce prohibitions on abuse of dominant positions and use market investigations
- Competition agencies should more actively enforce abuse prohibitions and use market investigations to uncover harmful behavior without reported law breaches.
- Example: A 2018 Australian inquiry into the dairy industry led to mandated improvements to contracting practices between farmers and processors.
- 3) Promote competition in input markets, including labor
- Vigorously enforce rules to prevent ‘no poaching’ pacts.
- Reassess the use and enforcement of non-compete clauses in some retail and fast-food job contracts.
- 4) Empower competition authorities to address the digital economy
- Authorities should adapt to big data and artificial intelligence effects that multiply incumbent advantages.
- Facilitate data portability and interoperability to lower switching costs for consumers and enable new entrants.
- Precedent: The European Union boosted competition two decades ago by giving customers the right to keep their cell phone number when switching between operators.
- 5) Increase resources and sector-specific expertise
- Resources for competition enforcement matter.
- Example: In the United States, the combined budget of the Federal Trade Commission and the Department of Justice’s Antitrust Division is roughly half of what it was four decades ago, as a share of GDP.
- Investments may be needed across jurisdictions to boost expertise amid rapid technological change.
- Example: The United Kingdom recently announced a new Digital Markets Unit to govern the behavior of dominant platforms, such as Google and Facebook.
Additional policy priorities to support dynamism and the recovery
- Active competition-policy reviews underway in major economies (including the European Union and the United States) present opportunities to act now and prevent further rises in market power that could impede the recovery.
- Support for small and medium enterprises:
- Broader policy support is important because many small firms have been unable to benefit from government programs designed to help firms access financing during the pandemic.
- As policy support is gradually withdrawn, ensuring viable small and medium enterprises have access to financing is critical so they are not further disadvantaged relative to larger firms.
- Rationale:
- Preserving a level playing field will help spur a wave of young, high-growth firms that innovate and create high-quality jobs.
IMF Blog: "Rising Market Power—A Threat to the Recovery?", March 15, 2021.