American politics has a large cast of villains these days, but few cut across party lines as consistently as big business. The Biden administration is already considering using antitrust to break up big tech, and it may go a step further with an executive order to curb market power in other industries. The details remain unclear, but the order, still under consideration, would apparently give the government more power to regulate large firms.
Before we accede to government restructuring of the economy, we should first understand why big firms are dominating the market and whether they really harm the economy and workers as much as critics allege. It’s not enough simply to assume that big is bad.
An executive order with the intent of limiting private enterprise purely because of size would represent a major policy shift but also one that, for some critics, has been a long time in coming. Large firms dominate most industries. Economists call this the superstar effect, where one or a few large firms are more productive than the rest, growing ever larger and capturing most of the revenue and talent.
The existence of superstars worries some politicians, activists, and economists, leading some to argue that increased market power has led to wage suppression and mark-ups on prices. One can make a valid argument that the existence of large firms suppresses competition. A small upstart has a harder time getting a toehold in the market; in addition to being unfair, this could mean less innovation and growth overall.
Traditionally, market power went hand in hand with less competition, lower wages, and higher prices. But markets change. Economist Jay Ritter argues that in a more global, tech-driven economy, bigger firms are the only ones able to compete. They need to scale up quickly since the market is now global for both customers and competitors, requiring more resources. Technology and ecommerce have made consumers more aware of price and quality. Size has advantages: bigger firms can be more productive. In a market where goods and services are less sensitive to space and borders, the firm that offers the best, cheapest product first—like, say, Facebook—takes it all.
This dynamic holds in all countries. Clamping down on big companies in the U.S. won’t change a global economy that rewards superstars, and it won’t help small firms. It may succeed only in putting big American firms at a disadvantage in the global market.
Nor is it clear that big firms harm workers and consumers. Wages may be stagnating, but those who work at superstar firms get paid more because these firms generate more profits that they can pass on to workers. It’s possible, though unlikely, that regulations aiming to reduce productivity would increase worker pay at less-productive companies.
Evidence also suggests that, even if the U.S. economy has fewer employers, competition for workers at the local level is greater. How can that be? A quarter century ago, you could work only at your local hardware store; today, a Home Depot or a Lowes is usually in the area. So even if the market is more concentrated at the national level, individuals enjoy more choices for both goods and employment than they did before—especially in rural areas.
Evidence to support the claim that firms are charging big mark-ups on consumers is equally inconclusive. After accounting for quality, the price of many consumer and service goods has fallen over time. Even as firms’ market power has grown, prices have continued to fall, and some highly valued services—Google Maps and social media, for example—are free. Perhaps some firms are keeping more profits and returning them to their shareholders, but that doesn’t mean that consumers are worse off than they were before. They are often better off.
It may be good politics to beat up on large businesses, but economies change and so do market structures. Today’s big businesses might not be so big tomorrow. The top five firms in the S&P 500—Apple, Amazon, Microsoft, Facebook, and Alphabet—didn’t exist 50 years ago. Compare the American situation with antitrust- and regulations-oriented Europe, where the top five companies have been around for more than 45 years and have dominated their markets for decades. Is that a model we should imitate?
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