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Rising BigCorp Market Power and Emerging Policy Issues — A Threat to the Recovery?

IMF Blog | By Kristalina Georgieva, Federico J. Díez, Romain Duval, and Daniel Schwarz | Mar 15, 2021

the big keep getting bigger - Rising BigCorp Market Power and Emerging Policy Issues -- A Threat to the Recovery?

The crisis has hit small and medium enterprises especially hard, causing massive job losses and other economic scars. Among these—less noticeable, but also serious—is rising market power among dominant firms as they emerge even stronger while smaller rivals fall away.

We know from experience and IMF research that excessive market power in the hands of a few firms can be a drag on medium-term growth, stifling innovation and holding back investment. Such an outcome could undermine the recovery from the COVID-19 crisis, and it would block the rise of many emerging firms at a time when their dynamism is desperately needed.

Creating a more level playing field is now more important than ever. And governments will need to achieve it across a wide range of sectors—from brewing through hospitals to digital.

New IMF research shows that key indicators of market power are on the rise—such as the markup of prices over marginal cost, or the concentration of revenues among the four biggest players in a sector. Due to the pandemic, we estimate that this concentration could now increase in advanced economies by at least as much as it did in the fifteen years to end of 2015. Even in those industries that benefited from the crisis, such as the digital sector, dominant players are among the biggest winners.

A decades-long trend set to worsen?

A pandemic-driven rise in market power across multiple industries would exacerbate a trend that goes back over four decades. For example, global price markups have risen by more than 30 percent, on average, across listed firms in advanced economies since 1980. And in the past 20 years, markup increases in the digital sector have been twice as steep as economy-wide increases.

See:  To Support Disruptive Technologies, Take Bigness Seriously

Of course, strong profits have historically been the natural reward for successful firms that displaced incumbents through innovation, efficiency, and improved service. Think of how Ikea transformed the way we buy furniture, or how Apple changed the market for mobile phones.

Recently, however, we see growing signs in many industries that market power is becoming entrenched amid an absence of strong competitors for dominant firms. Across different sectors, we estimate that 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.

The big tech firms are a case in point: the market disruptors that displaced incumbents two decades ago have become increasingly dominant players that do not face the same competitive pressures from today’s would-be disruptors. Here the pandemic-related effects are adding to powerful underlying forces such as network effects and economies of scale and scope.

Implications for policymakers

So, what can governments do? We would like to highlight five priorities—whose importance will vary across jurisdictions.

First, competition authorities should be increasingly vigilant when enforcing merger control. The criteria for competition authorities to review a deal should cover all relevant cases—including acquisitions of small players that may grow to compete with dominant firms. For 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 also contribute to more effective enforcement of competition rules.

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Second, competition authorities should more actively enforce prohibitions on the abuse of dominant positions and make greater use of market investigations to uncover harmful behavior without any reported breach of the law. In 2018, an Australian inquiry into the dairy industry illustrated the benefits: it led to mandated improvements to contracting practices between farmers and processors.

Third, greater efforts are needed to ensure competition in input markets, including labor markets. Here, vigorous enforcement of rules to prevent ‘no poaching’ pacts between firms would be welcome. Non-compete clauses in some retail and fast-food job contracts also make it harder for employees to move to better-paid jobs—which is especially relevant for low-skilled workers.

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