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Do companies have too much power?

MR. MONOPOLY gears up to enjoy a ride in a Ford Mustang.
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Feeling fine.
  • Dan Kopf
By Dan Kopf

Data editor

Published This article is more than 2 years old.

Capitalism works best when competition is strong. When companies have too much power, they are able to charge consumers far more than it costs to make a product or deliver a service, generating huge profits. Companies facing fewer challengers also have less incentive to innovate or pay their employees well. A world dominated by powerful companies may also lead to slower economic growth.

Many researchers believe we already live in this world. Economists Jan De Loecker of Princteon and Jan Eeckhout of University College London are sounding the alarm particularly loudly. Last year, they reported that markups in the US, defined as the amount above cost at which a product is sold, had jumped from about 18% in 1980 to 70% in 2014. They suggested that this rise could account for many of the problems in the US economy, from inequality to fewer startups.

Now, De Loecker and Eeckhout are back with another paper about the power of companies, and it’s more bad news (pdf). According to their analysis of the financial statements 70,000 companies across 134 countries, the rise in markups is a worldwide phenomenon. They find that while global average markups were less than 10% in 1980, they were at almost 60% in 2016. For most countries, the companies in the dataset represent more than two-thirds of that country’s economy.

While the greatest increases in markups have come come in North America and Europe, every region but South America saw large rises—and that’s because markups in South America were already high. The economists’ latest analysis does not attempt to explain the rise, but in their examination of the US, De Loecker and Eeckhout offer a few possible explanations, including deregulation and an increase in mergers and acquisitions.

Average markup by region in 1980 and 2016

North America13%76%
South America58%59%

Not everybody agrees with their analysis. The dispute is a technical one.

To arrive at their markup estimate, De Loecker and Eeckhout take the “cost of goods sold” figure in a company’s financial statement and compare it to that company’s sales. They claim that cost of goods sold includes most of the expenses a company can control in the short term. Fixed costs, like the money spent to build a factory, are not included in markup calculations because in a truly competitive market, they should not impact pricing. Companies battling each other for sales can only worry about their costs right now.

The researchers who disagree with their methodology think De Loecker and Eeckhout are missing some big, important costs. For example, University of Chicago economics PhD student James Traina points out that costs of goods sold ignores most of a company’s marketing and management expenses. Marketing and management costs have skyrocketed in the US since 1980, and he finds that when these costs are included the rise in US markups is much smaller. De Loecker and Eeckhout dispute Traina’s methodology, contending that many marketing and management costs are not truly short-term in nature.

The IMF has since weighed in, and come down on the side of De Loecker and Eeckhout. In a recent research paper, the IMF found that markups have indeed increased across the world; even when you account for marketing and management expenses, the rise has been dramatic. It suggests that the companies with the highest markups invest the least, basking in their market power and resting on their laurels.

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