Senator Elizabeth Warren vowed not to “let a handful of monopolists dominate our economy.” Senator Amy Klobuchar claimed we were living through “another gilded age.” “In sector after sector…” Bernie Sanders added, “we need a president who has the guts to appoint an attorney general who will take on these huge monopolies.” Last week’s Democratic debate showed a clear conventional wisdom in that party: America’s economy is besieged by a monopoly problem.
Markets are said to be dominated by ever smaller numbers of firms enjoying rising markups of price over cost. Consumers are supposedly suffering higher prices and less innovation while competitors struggle to stay afloat because of behemoth anticompetitive behavior. The explanation? Supposedly a turn away from anti‐monopoly policies over recent decades. Warren buys into the idea that antitrust laws have not been rigorously enforced. And she and others want the federal government to break up or more tightly regulate massive companies.
Yet, increasingly, new academic evidence shows meaningful choice has not fallen in most sectors. In fact, the economic trends we do see appear to arise not because of weakly enforced antitrust laws, but because of an ongoing “industrial revolution in services” that is good for consumers.
Back in 2016, President Obama’s Council of Economic Advisors started the narrative about rising “concentration” of industries. Its work concluded that revenue shares of the top 50 firms in ten of 13 very broad sectors had risen between 1997 and 2012. This was not necessarily evidence of weakened competition or harm to consumers, they admitted, but such findings allowed the myth of rising monopoly power to take hold.
Such broad industry categories were clearly absurd for thinking about meaningful competition, however. Groupings such as “Real Estate” or “Retail” meant assessing Walmart, IKEA, McDonald’s, and Foot Locker as if they were in the same industry, even though these companies don’t meaningfully compete.
But the truth is, even narrower industrial classifications at a national level are not particularly helpful. Most real “markets” are incredibly local. When buying toothpaste, you might purchase from a local CVS, Safeway, Walmart, independent pharmacies, or order online from Amazon or elsewhere. A national concentration of the top 4 pharmacies’ market share says nothing about options in an individual city.
Suppose Starbucks opened a new outlet in a rural town, reducing the strength of a local monopolistic café. Meaningful choice will have risen for consumers if the café remains open too, but Starbucks’ new outlet would suggest rising national concentration in the sector. Observing national concentration measures, and presuming them a proxy for consumer welfare (which most economists would warn against anyway), would scream a problem. But locally, competition and choice would have improved.
This is, in fact, what has happened across America. A report by economists at Princeton and the Richmond Fed last year confirmed that national concentration has indeed increased across many industries. Yet in sectors accounting for 72 percent of employment and 66 percent of sales, concentration fell in narrower geographical market territories, such as urban areas, county, or ZIP code levels. When Walmart opens a new store, for example, they found local concentration tends to fall and the number of stores in the local discount department store sector rises, on average, despite the giant’s national market share increasing.
What’s happening is that top firms are investing in new information technology, finding efficiencies to serve more local markets. Investments in productive high fixed cost IT are delivering standardization, reducing the costs of serving more locations. National concentration trends are therefore arising for “good reasons,” not anticompetitive behavior. Cheesecake Factory, for example, has invested in technologies that help in improving staffing management, food purchasing, and menu adaptation, allowing them to roll out menu items nationwide in just 7 weeks.
Hospital chains, and other service, retail, and wholesale industries are seeing market leaders proliferate geographically too. Employment is rising in industries that are becoming more highly concentrated nationally, suggesting that this isn’t a story about “monopoly power” constraining output and raising prices. Instead, what we’re seeing is the most productive firms serving more places. Economists who coined the term “the industrial revolution in services” estimate that a full 93 percent of the growth in concentration across national industries comes from large firms serving more localities.
Choice on the ground then is improving, and big tech is part of that story too. Facebook and Google are giving businesses a new outlet for their adverts, and in turn taking more national advertising market share themselves. But their entry is meaningful competition to local adverts on billboards, TV, and in newspapers. Amazon is providing huge efficiencies in retail too, competing with a range of local stores, and facilitating broader competition through hosting third‐party sellers.
Yes, national concentration has risen. And, yes, many markups have too. But it’s the adoption of new technologies lowering top firms’ costs of expansion that explains these trends, not underenforced antitrust, or firms raising prices.
If correct, this new evidence suggests we don’t need to give more power to regulators, nor do we need a revival of some broader antitrust. What we need, as Google’s chief economist Hal Varian has intimated, is time to allow these technologies to diffuse through the economy. It takes time for entry in relation to higher markups and for new technologies to become cost effective for other firms to adopt them. When they do, these technological changes will result in widespread efficiencies, and lower prices still.