from the Philadelphia Fed
— this post authored by Leena Rudanko, Economic Advisor and Economist, Federal Reserve Bank of Philadelphia
Recent evidence suggests that product market concentration has been on the rise in the U.S. since the early 1980s.1 This means that sales in a broad set of markets appear to be concentrating in a smaller share of firms. In other words, big firms are coming to dominate markets. This rise in concentration concerns policymakers, as it suggests that product markets are becoming less competitive. Healthy competition, most economists agree, is an important feature of a well-functioning market, allowing consumers to get the best possible prices, quantity, and quality of goods and services. And to ensure that competition prevails, the government should enact and enforce antitrust regulations.
Rising concentration has coincided with other, related long-run changes: rising firm profit rates and markups, weak wage growth (and a related decline in the share of output paid as compensation to workers), low firm investment, low productivity growth, and a decline in firm entry.
In this article, I review recent studies related to this rise in concentration and consider the economic significance of this trend. I suggest a more positive interpretation of the evidence. It may be that firms are growing larger due to a change in productive technologies that favors larger firm size, as development in information technologies is making it feasible to operate on a larger – even global – scale. In this context, the benefits of concentrating economic activity may outweigh the costs of larger firms profiting from their market power. But to fully understand the situation, we need more detailed analyses of specific markets.
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Source
https://www.philadelphiafed.org/-/media/frbp/assets/economy/articles/economic-insights/2021/q2/eiq221.pdf
