US Economics Analyst

Concentration, Competition, and the Antitrust Policy Outlook (Briggs/Phillips)

Research | Economics | By Jan Hatzius and others
  • On July 9, President Biden issued an executive order on promoting competition in the US economy. In this week’s Analyst, we survey the current competitive landscape and how it might change in response to President Biden’s proposals.

  • The Biden administration’s competition agenda is motivated by a long-run rise in market concentration, which is partially explained by the increased prevalence of platform markets that benefit from positive network effects. The rise in national concentration may not have reduced consumer welfare, however, since concentration has actually declined at the local level.

  • Whether the rise in national concentration is problematic depends on its underlying cause, since it could reflect less active competition policy that benefits large firms and ultimately lowers output, but could also reflect increased productivity dispersion and the rise of superstar firms that have boosted growth. We see evidence that both of these explanations—which reinforce one another—have contributed to the long-run concentration increase.

  • We see three potential antitrust policy changes that could push against rising concentration. First, antitrust policy will likely broaden its focus to consider the interests of producers, suppliers, and workers, not just consumers. Second, antitrust policy will likely increasingly emphasize competition for its own sake rather than economic outcomes. Third, we anticipate a lower bar to challenging business combinations and practices and more active antitrust enforcement.

  • In terms of implementation, new leadership at antitrust agencies will likely meaningfully change enforcement, and the FTC has already signaled intent to modify merger guidelines. We also see the July 9 executive order—which has many industry-specific recommendations but few specific actions—as signaling a renewed executive branch focus on antitrust issues. However, legislative actions will likely be more incremental, and it is unclear whether bills proposing changes to the regulation of online platforms have enough support to pass.

  • Academic studies suggest that an antitrust policy shift that pushes against rising market concentration will lower prices and increase the labor share of GDP. The implications for productivity growth are ambiguous, however, with several recent studies finding a positive relationship between concentration and productivity. 

Concentration, Competition, and the Antitrust Policy Outlook

On July 9, President Biden issued an executive order aimed at addressing excessive market concentration through a more active antitrust policy stance and promoting competition in US product and labor markets. In this week’s US Economics Analyst, we survey the current competitive landscape and the potential actions from the Biden Administration, antitrust agencies, and Congress.

The Current Competitive Landscape

The Biden administration’s focus on competition is largely motivated by a long-run increase in national product market concentration. Among public companies, the average revenue share of the five largest firms in each industry (weighted by industry revenue) has increased steadily since the late 1990s, while the Herfindahl-Hirschman Index (HHI)—a leading measure of market concentration calculated as the sum of squared revenue shares for all firms—has similarly risen (Exhibit 1). Despite some challenges and debate around measurement,[1] a growing academic literature shows that the trend of higher domestic product-market concentration over the last 20 years is robust across concentration metrics and datasets.

Exhibit 1: Market Concentration Has Increased at a National Level

Source: Compustat, Goldman Sachs Global Investment Research

Focusing on specific industries, HHIs have increased in 70% of industries (at the 3-digits GICS level) since 1998, and almost 20% would currently be considered “highly concentrated” according to the Department of Justice (DOJ) and Federal Trade Commission (FTC)’s definition (Exhibit 2). Intuitively, concentration is currently the highest for Interactive Media and Services (e.g., Facebook and Google) and has notably increased for Telecom, Tech, Media, and Retail, industries where platform markets that benefit from positive network effects have driven rapid increases in market share for the largest firms over the last 20 years.

Exhibit 2: Concentration Has Increased Notably in the Telecom, Tech, Media, and Retail Industries

Source: Compustat, Goldman Sachs Global Investment Research

Despite the seemingly clear nationwide trends shown above, concentration trends look very different if product-markets are more narrowly defined (Exhibit 3). For example, recent research from Rossi-Hanberg, Sarte, and Trachter (2020) shows that product-market concentration has decreased at the local level,[2] a pattern explained by increasing entry of larger national firms in local markets. Furthermore, local concentration has declined by more in industries like services and retail where the concentration debate has centered due to the growing importance of large national companies like Amazon. Because the local market is most relevant for most consumer purchases, these patterns suggest that the increase in national concentration likely increased consumer choice and welfare, although it still might have been harmful to small sellers and input producers.

Exhibit 3: Concentration Has Fallen at the Local Level Despite Increasing at the National Level

Source: National Establishment Time-Series Database, Rossi-Hanberg Sarte Trachter (2020)

Recent research from the NY Fed also suggests that nationwide trends may be misleading due to omission of revenue earned by foreign firms competing in the US market.[3] Focusing on the manufacturing sector, Amiti and Heise (2021) find that typical concentration measures were unchanged between 1992-2012 after adjusting for sales by foreign exporters, again suggesting more nuanced concentration dynamics in the markets relevant to consumers.

Concentration vs. Competition

Abstracting from measurement, whether higher nationwide concentration reflects anti-competitive behavior or increased efficiency is an active debate.

One explanation of increased concentration is increased monopoly power due to changes in competition policy that benefited incumbent and large firms. Along these lines Gutiérrez and Philippon (2017) find that industries where regulation has risen to prevent entry of new firms have also exhibited larger increases in industry concentration.[4] Also consistent with this explanation, business combination and antitrust enforcement activity has declined over time (Exhibit 4), although the largest drop-off occurred in the early 1980s following changes in merger and antitrust guidelines.

Exhibit 4: Antitrust Enforcement Cases Have Dropped Since the 1970s

Source: Department of Justice, Federal Trade Commission, Goldman Sachs Global Investment Research

Some evidence also exists that firms are taking advantage of increased market power. For example, IMF research suggests that price markups (defined as price/marginal cost) have increased by 42% since 1980 (left chart, Exhibit 5)[5], while profit margins have increased more since 1997 in industries that experienced larger increases in concentration (right chart, Exhibit 5).

Exhibit 5: Increases in Markups and Profit Margins Might Suggest That Firms Are Leveraging Market Share for Higher Profits

Source: International Monetary Fund, Bureau of Economic Analysis, Census Bureau, Goldman Sachs Global Investment Research

However, the increase in market concentration could instead reflect increased productivity dispersion— possibly due to the emergence of new technology that has encouraged the rise of superstar firms.[6] Consistent with this explanation, recent research from the OECD suggests that productivity dispersion has risen over time, particularly in the information and communication services sector where “winner-takes-all” dynamics are especially relevant (Exhibit 6).[7]

Exhibit 6: Productivity Differences Across Firms Have Risen over Time, Especially in the Information and Communication Services Industry

Source: Andrews Criscuolo Gal (2016), ORBIS, OECD

Finally, we note that the two potential explanations for the increase in national product-market concentration should reinforce one another, since the rise in superstar firms might have been eased by less restrictive antitrust policy. Taken altogether, we believe that both long-term shifts in competition policy in favor of large firms and technological changes that increased productivity dispersion have contributed to the rise in national product market concentration.

Regardless of whether the high levels of national concentration reflect anti-competitive behavior or increased efficiency of top firms, sustained increases in concentration may still be harmful for competition. For example, the rising national concentration and declining local concentration trends may have thus far been positive for the economy on net, but stable national concentration and declining local concentration might have led to even higher competition today, assuming the net result is still to provide more options in each individual market. As a result, high levels of concentration are likely negative from a competition standpoint even if the economy has benefited from the dynamics that led to them.

The Competition Policy Outlook

Against this backdrop, a Democratic administration and Congress raises the prospect of meaningful changes to antitrust policy. Antitrust issues have become more central in Democratic plans to address wage growth and income and wealth inequality: during the Obama Administration, officials more directly linked concentration with negative economic outcomes, and antitrust became a central theme for several Democratic presidential hopefuls. Even under the Trump Administration, antitrust enforcement became more active in some areas, including the first legal challenge to a vertical merger since 1979 and the commencement of cases against Google and Facebook. The change in political control following the 2020 election is likely to lead to greater antitrust enforcement, we believe, though increasing antitrust scrutiny has looked likely regardless of election outcome.

We think there are three main ways antitrust policy could shift.

  • A broader focus than “consumer welfare”. The July 9 White House executive order focuses on the interests of producers, suppliers, and workers, not just consumers. A number of congressional Democrats share the position, which is a basic tenet of the “New Brandeis School” of antitrust thinking.

  • A greater focus on “structures and processes” rather than economic outcomes. Since the 1980s, antitrust enforcement has focused primarily on price effects, often using quantitative empirical analysis. However, a focus beyond consumer welfare makes consumer price effects less central. Moreover, in an era of free digital services, measuring competition on price alone becomes more difficult.

  • A lower bar to challenging business combinations and practices and a more active antitrust enforcement. Beyond the approach enforcement takes, there is likely to be more of it. A broader scope, heightened focus and greater resources are likely to raise the probability that antitrust agencies investigate a given practice or business.

Competition policy changes are likely to come from three places. First, the antitrust agencies themselves are likely to change their policies. Newly seated FTC Chair Lina Khan gives Democratic commissioners a 3-2 majority and President Biden might soon nominate an Assistant Attorney General for Antitrust. The change in leadership is likely to result in meaningful changes to antitrust enforcement.

Already, the agencies have signaled intent to modify their merger guidelines. Critics of current antitrust policies have argued for revisions to the Horizontal Merger Guidelines and the Vertical Merger Guidelines, which the DOJ and FTC jointly publish as a guide to their analytical techniques, practices, and policies. Courts have followed prior revisions to the guidelines, so changes could affect not only agency decisions but court rulings as well.

The FTC has announced other changes, including rescinding its policy regarding “unfair methods of competition”, which Chair Khan described as having restrained FTC enforcement of unfair business practices, and lowering the bar for subpoenas and other investigative processes, which is likely to increase the frequency and scope of investigations going forward.

Second, the White House and other executive branch departments are set to take a renewed look at antitrust issues. On July 9, President Biden issued an executive order that establishes a new White House Competition Council and instructs executive departments and agencies to consider several general issues, among them:

  • The intersection of intellectual property and antitrust law: The order targets patent evergreening strategies, pay-for-delay settlements, and the licensing of standard-essential patents. These are of primary importance to biopharma and the tech/telecom sector, but could have implications for other sectors as well.

  • Regulatory and licensing requirements: The order raises the issue only in general but reforms could potentially lower the bar for new entrants in a number of industries, among them real estate, health care, and agriculture. Licensing requirements reduce labor market competition by limiting the number of eligible workers.

  • Non-compete clauses: The focus appears to be on lower-skill workers, in particular, though this could affect a broad range of occupations and industries.

The EO also has many industry-specific recommendations, though in most cases it highlights issues and does not call for specific actions. Some of these deal with competition directly, such as manufacturer-imposed restrictions on the repair of products from tractors to cell phones, which could disadvantage independent service providers and parts manufacturers. Others are aimed at addressing the symptoms of industry concentration on consumers, such as potentially excessive fees in the airline, financial, and telecom sectors. Among the sectors named in the EO are: agriculture, airlines, alcoholic beverages, biopharma, container shipping, financials, freight rail, health insurance, hospitals, internet platforms, real estate brokerage, and telecommunications.

The third venue for action is Congress. We think there will be some areas of bipartisan cooperation but expect legislation to make incremental changes. Congress might also consider more fundamental changes to internet regulation, for example, but it looks less likely to us that these will become law over the next year as current rules are likely to require a supermajority vote in the Senate—changes to antitrust laws are unlikely to be eligible for the reconciliation process congressional Democrats will use to pass major fiscal legislation this year—and even some Democratic lawmakers have expressed reservations about some of the pending legislation.

Congress is likely to increase funding for antitrust enforcement, which has declined substantially as a share of GDP over the last few decades. The Senate passed legislation in early June that would increase merger filing fees for the largest transactions by 8x, as well as increase base funding for the FTC and the DOJ Antitrust Division. Similar legislation passed recently in the House Judiciary Antitrust Subcommittee. Such a funding increase, which looks likely to pass, would likely to lead to increased enforcement activity even absent other changes.

The tech sector, and internet platforms specifically, have become a major political focus and several pending bills focus on this area. Among these are a bill to prohibit “dominant online platforms” from acquiring potential competitors, a bill to require platforms to make consumer data interoperable with competitors, a bill to restrict platforms from favoring their own products or services over other businesses using the platform, and a bill to restrict platforms from using control of multiple lines of business to disadvantage competitors. While each of these bills passed at the subcommittee level, it is less clear whether they will have sufficient support to pass the full House or, more importantly, the Senate, where at least 10 Republican votes would be needed. As it stands, we do not expect any of these bills to become law this year, though eventual legislative action cannot be ruled out.

How Will Changes to Competition Policy Affect the Economy?

The ultimate effects of shifts in competition policy on the economy are hard to predict, both because of uncertainty around the policy outlook and because prior evidence is usually context and market specific. However, existing research (summarized in Exhibit 7) provides some guidance to how a shift in antitrust policy that pushes against rising market concentration might impact economic outcomes.

Prior research finds that increased concentration is associated with higher profit margins, higher prices, lower labor shares of output, and lower wage growth.[8] As a result, we expect that the proposed policies will, at least directionally, lower prices and boost wages in sectors subjected to increased scrutiny.

The implications for investment and productivity growth are more ambiguous, however. Although some studies find that investment and productivity decline as firms accumulate market power, several recent studies find a positive relationship between concentration and productivity. For example, Hsieh and Rossi-Hansberg (2021) show that the increased entry of national companies into local service markets has increased concentration and driven higher investment and productivity growth.[9] These findings suggest that the impact of more restrictive competition policy on growth could be either positive or negative.

Finally, several recent studies find that financially constrained firms with low market power respond more strongly to policy rate changes, suggesting that a policy shift that reduces market concentration could—again, at least directionally—amplify monetary policy transmission.

Despite these predictions, any effects on market concentration and aggregate economic outcomes due to changes in antitrust policy will likely not be observable for several years, although specific sectors subject to increased scrutiny may be affected sooner.

Exhibit 7: Academic Studies Suggest Increases in Concentration Increase Prices and Lower Wages, but the Impact on Investment and Productivity Is Ambiguous

Source: Goldman Sachs Global Investment Research

Joseph Briggs

Alec Phillips

The US Economic and Financial Outlook

Source: Goldman Sachs Global Investment Research

Economic Releases

Source: Goldman Sachs Global Investment Research

1 ^ Changes over time in the tendency for firms to be publicly listed can create some bias in concentration ratios.
2 ^ Esteban Rossi-Hansberg & Pierre-Daniel Sarte & Nicholas Trachter (2020). "Diverging Trends in National and Local Concentration," NBER Chapters, in: NBER Macroeconomics Annual 2020, volume 35, pages 115-150, National Bureau of Economic Research, Inc.
3 ^ Amiti, Mary, and Sebastian Heise. "US Market Concentration and Import Competition." (2021).
4 ^ Gutiérrez, Germán, and Thomas Philippon. “Declining Competition and Investment in the US.” No. w23583. National Bureau of Economic Research, 2017.
5 ^ Diez, Federic, Daniel Leigh and Suchanan Tambunlertchai. “Global market power and its macroeconomic implications.” International Monetary Fund, 2018
6 ^ Daan Struyven. “Super Profits and Superstar Firms”. US Economics Analyst, July 22, 2017.
7 ^ Andrews, Dan, Chiara Criscuolo, and Peter N. Gal. "The best versus the rest: the global productivity slowdown, divergence across firms and the role of public policy." (2016).
8 ^ Daan Struyven. “Superstar Firms, Super Profits, and Shrinking Wage Shares”. US Economics Analyst, February 4, 2018
9 ^ Hsieh, Chang-Tai, and Esteban Rossi-Hansberg. “The industrial revolution in services.” No. w25968. National Bureau of Economic Research, 2019.

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We, Jan Hatzius, Alec Phillips, David Mericle, Spencer Hill, CFA, Joseph Briggs, Ronnie Walker and Laura Nicolae, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships.

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