Economics textbooks generally begin with a simple model in which prices of goods and services are determined by supply and demand in competitive markets and firms are “price-takers.” Yet it is much closer to reality to view the world we live in as one in which a handful of very large companies dominate most markets and have the power to administer prices so as to earn well above average profits or “rents.”
Brian Lee Crowley of the Macdonald – Laurier Institute recently drew attention in this space to a major study by leading MIT economist David Autor and colleagues which argued that the widely noted shift of national income to profits and away from labour since the 1980s, particularly in the 2000s, is closely associated with increased corporate concentration across many industries.
Especially high profits are earned by “superstar” firms such as Amazon, Apple and Microsoft which have won dominant market shares in specific sectors by virtue of size and scale, the establishment of some kind of unique competitive advantage, and exceptionally high productivity.
Here in Canada, the Centre for the Study of Commercial Activity (CSCA) at Ryerson University reports in the Retail 100 Report for 2016 that 76% of all non auto Canadian retail sales are now accounted for by the top one hundred conglomerates, and that the top ten conglomerates account for one half of all retail sales
Jordan Brennan of the Canadian Centre for Policy Alternatives has shown that the top sixty Canadian corporations account for 45% of all corporate assets, up from 25% in the 1980s, and for 50% of all corporate profits, up from 30% over the same period.
He argues that, as in the United States, increasing corporate concentration helps explain the rising income share of the very affluent, many of whom are major equity owners and/or senior executives of large and increasingly profitable private sector companies.
For Mr. Crowley, the answer to increased corporate concentration and rising inequality is to foster greater market competition to reduce prices and lower excess profits. But this approach , based on textbook economics, is problematic in terms of the public interest.
Large size and dominant market positions increase economies of scale and generate other sources of efficiency. One does not have to love Wal Mart to see that its business practices sustain, not just high profits, but also low consumer prices, albeit at the cost of low-paid workers and suppliers who are constantly squeezed to lower costs.
Here in Canada, the Competition Bureau accepts reduced competition in markets if this lowers prices through greater efficiency. As well, large firms have the resources to be major sites of innovation and research and development, and tend to be technological and organizational leaders.
In short, textbook competitive markets dominated by small firms are not necessarily desirable.
In the 1960s, institutional economists like John Kenneth Galbraith described a world of oligopoly in which a few firms, such as the big three in auto, set prices in order to achieve profit targets. This cozy world was disrupted by increased international competition, and by deregulation and privatization of the utilities, transportation and financial sectors, but corporate concentration has staged a major comeback
Mr. Galbraith advocated countervailing power rather than competitive markets as a way to constrain large dominant firms. In his view, corporate power had to be balanced by the power of organized labour so that profits were shared by workers, and by the power of democratic governments to regulate prices, service quality, and product and environmental standards in the public interest
A similar argument has been advanced by Nobel prize winning economist Joseph Stiglitz in a publication of the Roosevelt Institute, Rewrite the Rules. Mr. Stiglitz believes that extreme income and wealth inequality in the United States is indeed closely associated with the increased market power of large corporations, and argues for increased regulation (especially in the finance sector), support for trade unions and stronger labour standards, and corporate tax reform.
Mr. Stiglitz also argues that competition would be advanced by weakening protection for so-called intellectual property rights in domestic law and in international investments agreements, directly challenging the power of dominant patent holders in the pharmaceutical and information technology industries
In this new age of corporate concentration, we certainly need a much broader response than competition policy alone.
Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton and Senior Policy Advisor to the Broadbent Institute.