The Rise of the Titans

In an upcoming IMF working paper entitled “Global Market Power and Its Macroeconomic Implications,” the authors discuss the negative implications of the rise of corporate giants. As the graph below shows, the average markups on goods and services in advanced economies, which has accelerated over the past decade, has increased by 43% since the 1980s vs. only about 5% in less developed economies. This concentration of market power has several negative implications. 

The first negative implication that the authors found is that the initial response to markups in concentrated industries is increased investment and innovation. However, this relationship turns negative once the market position becomes too strong. Additionally, the correlation becomes increasingly more negative with higher degrees of market control. One can easily think of many examples where this has been the case. The utility industry has innovated very slowly in the US over the past three decades due to their monopoly positions. It’s not until a disruptive technology challenges the incumbent do these industries begin to respond with modest positive investment and innovation. The same can be said for the auto industry and many others.

The second negative implication comes from the fact that the study found as market concentration increases, the share of profits that goes to labor income decreases. Ultimately, declining revenues for workers will likely have negative implications for both economic and possibly social conditions. Thus, as policymakers worldwide consider the growth of corporate Goliaths such as Amazon, Google, and others, they should be cognizant of the need to maintain adequate regulations to insure continued positive growth for their societies.

Titans MarketPower