Product market concentration in and of itself does not hurt the poor, even in an economy with high inequality and market power by large firms.
This is the conclusion of research by Corina Boar and Virgiliu Midrigan to be presented at the virtual annual congress of the European Economic Association in August 2020.
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Their study is motivated by the fact that profits, mark-ups, product market concentration and inequality in the United States are at their highest level in recent history. Since the rich disproportionately own firms, a growing concern is that these high profits accrue to only the rich, thus hurting the poor. This concern has led to calls for policies that reduce concentration in the product market as means to redistribute towards the poor.
Motivated by these calls, the authors study the design of product market policy when the policy-maker is concerned not only with economic efficiency, but also with redistribution. The authors find that, in contrast with conventional wisdom and implicit calls for breaking up large firms, optimal policy prescribes an even greater degree of product market concentration than observed in the data.
Intuitively, the policy-maker faces the following trade-off. On one hand, since larger firms have higher mark-ups, they charge prices that are too high and so they face too little demand and therefore they produce too little relative to what would maximise economic efficiency. Increasing economic efficiency thus requires that large firms produce even more, and so a higher degree of product market concentration is desirable.
On the other hand, if larger firms produce more, their owners earn more profits, which increases wealth and income inequality.
The authors evaluate this trade-off by studying an economy with a large number of households that differ in their labour market earnings and their entrepreneurial talent. They assume that larger firms have more market power and so are able to charge higher mark-ups. The analysis reproduces the large wealth and income inequality and product market concentration in the United States and so can serve as a useful laboratory to evaluate the effects of policies that change product market concentration.
The authors find that a policy that increases product market concentration is desirable. Specifically, a subsidy to the largest 0.5% of firms that is financed by taxing the remaining firms benefits 95% of households. Even though such a policy increases concentration by reducing the number of firms by 30%, it reallocates employment towards more productive firms, thus increasing labour productivity and wages.
The increase in wages primarily benefits poor households for whom this is the main source of income. The majority of households gain from such a policy despite the increase in income and wealth inequality.
In contrast, a policy that reduces concentration by halving the market share of the largest firms, thus mimicking recent policy proposals, backfires. Such a policy reduces mark-ups and inequality, but leads to substantial reallocation of production towards smaller, less efficient firms. This reduces wages by nearly 10%, leaving 97% of households in a worse position.
The results suggest that anti-trust authorities should primarily be concerned with maximising economic efficiency, and product market concentration in and of itself is not costly.
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CONTACT
Corina Boar
New York University and NBER
Email: corina.boar@nyu.edu
Office phone: +1 212-998-8898
Webpage: https://sites.google.com/site/corinaboar/
Virgiliu Midrigan
New York University and NBER
Email: virgiliu.midrigan@nyu.edu
Office phone: +1 212-992-8081
Webpage: http://www.virgiliumidrigan.com/