Two stories about competition and market power

Here’s an interesting interview with Elizabeth Warren:

Foer: There are all these hints of Louis Brandeis in what you do. Brandeis had a vision of how the economy could be structured differently when the rules that he wanted were applied. He  favored the small shopkeeper. In your vision, who gets favored? Are there forces in the market that you feel like are being unfairly shackled that you want to see unleashed?

Warren: Yes. Perfect. Competition. I love competition. I want to see every start-up business, everybody who’s got a good idea, have a chance to get in the market and try. This is what’s so interesting to me. There are so many people right now who argue against these reforms and other reforms, who claim they are pro-business. They’re not. They’re pro-monopoly. They’re pro–concentration of power, which crushes competition.

This is where the political and the economic interact. Once a corporation climbs up the ladder so that it’s got hundreds of millions—no, so that it’s got billions of dollars in resources—today too many of them turn around and use those resources to influence government to cut off that ladder, so nobody else climbs it. To cut off that ladder so that the big guys don’t have to compete with the little guys anymore.

Vox’s Weeds podcast had a good episode on Warren’s corporate governance plan that included analysis of this side of Warren — the fact that she thinks about how markets should work more than many progressives, rather than focusing just on what government should be doing. Foer has also covered this before in The Atlantic. I quote the relevant passage here.

But I want to compare Warren’s quote to the conclusion of a review paper by MIT’s John Van Reenen, who summed up the evidence on market power recently at the central bankers’ Jackson Hole meeting. Van Reenen:

Increased concentration brings with it the concern of market power and indeed, some have argued that many of the economic ills we face today in terms of sluggish productivity and real wage growth are due to rising monopoly power. My view is that this conclusion is premature. Rising aggregate markups and concentration may also reflect changes in the nature of competition where superstar firms are rewarded with greater market share in “winner take most” markets. I have offered some evidence more in line with the nuanced superstar firm model than a general fall in competition due to anti-trust and regulation. But this is for sure not the final paper in this area, however, and there are substantial uncertainties.

A final word of warning. Even if it was the case that the world is closer to the superstar firm model, this does not mean that anti-trust policy should be relaxed. Even if superstar firms attain their currently dominant positions on their merits of out-competing rivals, it does not mean that they will always use their power for the good of consumers. They may well try to entrench their position through lobbying, erecting entry barriers and buying up future rivals. As larger parts of the modern economy become winner take most/all, it is important that competition authorities develop better tools for understanding harm to innovation and future competition, rather than the traditional emphasis on the pricing decisions of current rivals.

In my view, as someone following this evidence closely, Van Reenen nails it. He takes seriously the idea that market power has risen as a result of rent-seeking and anticompetitive behavior. And he takes seriously the alternative that technology and globalization have changed competition in ways that made some firms bigger and more productive. He notes that while the latter may sound more optimistic than the former (and probably is less harmful), it’s hardly benign.

Returning to Warren… it’s tempting to frame her view as belonging to the Jefferson-Hamilton debate that’s been going on since America’s founding, in which one side prefers industry and is fine with bigness, while the other prioritizes the little guy. That may be one productive way to think about it.

But I prefer to think of it this way: two things have happened in the U.S. economy over the past 30 or so years. First, information technology has dramatically changed the nature of the economy, of firms, and of how they compete. Second, corporations have become more powerful for a whole variety of reasons, and along the way become better able to shape competition in their favor. In some ways these are separate trends; we could have had one without the other. But to an extent they’re related. As Van Reenen notes, concerns that grow large due to technology can then turn their power toward rigging the game, what Zingales calls the “Medici Cycle.” Just as important, firms that are large but aren’t great at technology and so are threatened by digital competitors may up their lobbying and other rent-seeking activities in order to “compete”. See: massive consolidation in the media business in response to Netflix. If you can’t beat ’em, the theory goes, get bigger.

It’s not just that Warren is stepping onto the scene and offering a Jeffersonian view. It’s that she realizes the rise of corporate power over decades has had pernicious effects in the form of rent-seeking and anticompetitive behavior. An agenda that seeks to limit that power would likely do tremendous good. However, it’s important that advocates of this view recognize that it’s only half the story. There’s another major reason why big firms have gotten bigger, why certain firms pay better than others, why workers have less bargaining power, etc. That’s the role of technology. It doesn’t invalidate the other theory. But it calls for different remedies, and so it’s important to simultaneously keep both accounts in mind.