The Rise of Market Power?

by on August 23, 2017 at 12:17 am in Economics, Uncategorized | Permalink

I am referring to the new Jan De Loecker and Eeckhout paper that is starting to get some buzz (ungated versions here).  Their major result, quite simply, is:

In 1980, average markups start to rise from 18% above marginal cost to 67% now.

That sounds like big news, and probably it is.  But I don’t think the authors are doing enough to interpret their results.  There are two ways these mark-ups go could up: first there may be more outright monopoly, second there may be more monopolistic competition, with high mark-ups but also high fixed costs, and firms earning close to zero profits.  The two scenarios have very different distributional implications, and different policy implications as well.

Consider my local Chinese restaurant.  Maybe the fixed cost of a restaurant has gone up, due to rising rents and the need to invest in information technology.  That can mean higher fixed costs, but still a positive mark-up at the margin.  The marginal meal ordered there probably is taken from food inventory, representing almost pure profit.  They are happy when I walk in the door!  Yet they are not getting super-rich, rather they are earning the going risk-adjusted rate of return.

Now, if the economy is moving more toward monopolistic competition, higher mark-ups don’t explain other distributional changes in the macro data, such as the decline of labor’s share, as cited by the authors.

The authors consider whether fixed costs have risen in section 3.5.  They note that measured corporate profits have increased significantly, but do not consider these revisions to the data.  Profits haven’t risen by nearly as much as the unmodified TED series might suggest.  I do see super-high profits in firms such as Google and Facebook, however.  Those companies for the most part have lowered margins compared to the status quo ex ante when the relevant service cost infinity.  “Mark-ups over time” measurements become very tricky when new products are being introduced.

The authors argue that the rising value of the stock market (plus dividends) is further evidence for rising profits.  Maybe, but keep in mind that the public market is less and less representative of corporate America.  It also has significant survivorship bias, based on size, as superfirms are rising and the number of small and mid-sized companies listing has plummeted since the 1980s.  I suspect what has really happened is that large firms are way more profitable, partly because of globalization, not because they are doing such a major rip-off of American consumers.  In most areas we have more choice, maybe much more choice, than before.  I would be very surprised if it turned out that most good ol’ normal mid-sized service sectors firms saw a nearly fourfold increase of the profit rate relative to gdp since 1980, as the authors are suggesting might be true for the American economy as a whole.  Health care, maybe, I grant that.

Or consider old-style manufacturing.  The authors report that “Markups have gone up in all industries…”  This is in an environment where numerous other highly credible empirical pieces, backed also by good anecdotal observation, cite rising competition from Chinese and other global suppliers.  How does that all square?  I side with David Autor on that one, yet it is reported that those mark-ups, in the sectors where American business now competes with the Chinese, are rising as measured.  I am worried the paper does not at all try to square this tension.  Surely it means the measures are significantly wrong in some way.

Similarly, the time series for manufacturing output is a pretty straight upward series, especially once you take out the cyclical component.  If there is some massive increase in monopoly power, where does the resulting output restriction show up in that data?  Once you ask that simple question, the whole story just doesn’t add up.

Or ask yourself a simple question — in how many sectors of the American economy do I, as a consumer, feel that concentration has gone up and real choice has gone down?  Hospitals, yes.  Cable TV?  Sort of, but keep in mind that program quality and choice wasn’t available at all not too long ago.  What else?  There are Dollar Stores, Wal-Mart, Amazon, eBay, and used goods on the internet.  Government schools.  Hospitals.  Government.  Did I mention government?

I do think concentration in the American economy is up modestly, as I argue in The Complacent Class, and probably profits are up too, including relative to gdp.  Hospitals are the most significant practical problem in this regard, and again that squares with the anecdotal evidence.  As it stands, I don’t yet see that this paper has established its central claim that measured rising mark-ups indicate truly higher profits in a significant way.

Addendum: The section on macroeconomic implications I think is premature (they cite the declining labor share, declining capital share, decline of low skill wages, declining LFP, declining labor market flows, declining migration rates, and slower productivity growth).  They should try to calibrate this, to see if the postulated effects possibly might work out as suggested, and by the way RBC research really is useful.  And timing matters too!  Given the mechanisms the authors cite, what kind of timing lags are possible?  It would seem for instance that when mark-ups rise, real wages fall right then and there, due to the higher prices.  Is that what the data show?  Do the productivity growth effects, and their weird timing with 1973 and 1995-2004 breaks, fit into the same framework?  And so on.  I would be very surprised if the pieces fit together in even a crude sense.

And here are remarks by Rohan Shah.  I thank Alex and Robin for useful comments and discussion, of course without implicating them.

1 Steve Sailer August 23, 2017 at 12:46 am

I was in B school from 1980 to 1982 and then in the market research business.

My general impression is that, on average, business is wildly more profitable today than when my expectations were established in the first half of the 1980s.

2 Steve Sailer August 23, 2017 at 12:52 am

Similarly, rich guys today are much, much richer than rich guys in, say, 1982.

Has anybody trended Forbes 400 data over the years since it debuted in 1982?

I notice that Piketty hates the Forbes 400 list because he thinks his famous formula must prove that the rich are even richer than the Forbes lists say they are. He has this weird conspiratorial theory that the Old Rich (presumably, such as the Rothschilds) are much richer than the Forbes lists say they are.

That would seem like an interesting topic for academics to explore. But instead there doesn’t seem to be much academic interest in the super rich, one way or another.

3 msgkings August 23, 2017 at 1:14 am

Inequality expansion is very real. The gap between the rich and superrich and the middle class is exponentially higher than 1982.

4 Anonymous August 23, 2017 at 6:46 am

Six days a week that doesn’t matter.

I just drove by a billboard in Missouri which said “USA for sale, contact Bill or Hillary.”

We won’t have a better politics until the right-wing can learn to connect cause and effect.

5 Floccina August 23, 2017 at 11:52 am

Not sure what exponentially higher means in this context, can you give use the concrete numbers?

6 Careless August 23, 2017 at 3:27 pm

1.1 is an exponent

7 Ricardo August 23, 2017 at 9:52 am

It is not “wildly conspiratorial” to raise questions about the Forbes data. Here is what Forbes itself says about their methodology: “This year we started with a list of 570 individuals considered strong prospects and then got to work. When possible we met with list candidates themselves; we spoke with at least 97 billionaires this year. We also interviewed their employees, handlers, rivals, peers, attorneys and ex-spouses. We pored over hundreds of Securities & Exchange Commission documents, court records, probate records, federal financial disclosures and Web and print stories. We took into account all assets: stakes in public and private companies, real estate, art, yachts, planes, ranches, vineyards, jewelry, car collections and more. We also factored in debt. Of course, we don’t pretend to know what is listed on each billionaire’s private balance sheet, although some candidates do ­provide paperwork to that effect. Some billionaires who preside over privately held companies are happy to share their financial figures, but others are less forthcoming. To value these businesses we couple estimates of revenues or profits with prevailing price-to-sales or price-to-earnings ratios for similar public companies.”

Gabriel Zucman’s work on tax havens is relevant — if tax evasion among the super-rich (especially in Europe) is common, then there is only so much the intrepid reporters at Forbes can do before they run into a tangle of shell corporations and trusts in the Cayman Islands, Gibraltar, Delaware and Panama.

8 Steve Sailer August 23, 2017 at 7:56 pm

One way to test Piketty’s theory of colossal unknown Old Money in the hands of the Rothschilds and the like is to look for tangible assets, such as giant yachts or personal golf courses.

Personal golf courses are a particularly good test since they are readily visible from satellite photos. I’m familiar with most of the personal golf courses in recent Southern California history, and most were owned by well-known rich guys: Larry Ellison, Jerry Perenchio, Bob Hope, Walter Annenberg, etc.

There is, however, one small one in a canyon near Zuma Beach that I don’t know who owns. So maybe that’s a Rothschild golf course?

Anyway, I would encourage academics to look into this rather important question of just how rich the Old Rich are.

9 Evan Harper August 23, 2017 at 11:20 am

The Forbes rich lists are well known to be pure entertainment with little credible claim to actually represent lists of the world’s richest people or their net worths. This is not some ad hoc argument of Piketty’s.

10 msgkings August 23, 2017 at 12:52 am

No doubt, look at how much the stock market has increased since 1982. That was the beginning of the super bull run from 1982-2000. And we’ve come a long way since 2000.

11 Brian Donohue August 23, 2017 at 9:06 am

The “almost 18 years” since 2000 has easily been the worst “almost 18 years” period for the US stock market since 1950. Here are inflation-adjusted annual returns by decade for the S&P 500:

1950s: 16.8%

1960s: 5.2%

1970s: -1.4%

1980s: 12.0%

1990s: 14.9%

2000s: -3.4%

2010s: 11.1%

12 msgkings August 23, 2017 at 11:59 am

Thanks for the figures, I don’t think these counter anything I asserted. 1982 was definitely the start of the biggest bull run ever. And while the 2000s were awful, the 2010s have been strong and the S&P has gone from 1320 at the end of 2000 to 2448 today.

13 Brian Donohue August 23, 2017 at 9:14 am

Where does your general impression come from? Running a business?

If business is so wildly profitable today, why don’t more people do it?

14 Careless August 23, 2017 at 9:47 am

Isn’t this just the superstar effect brought to business-scale?

15 kevin August 23, 2017 at 9:56 am

Barriers implemented to stifle competition. Businesses aren’t spending money on lobbyists for no reason. 30 percent of workers need a license including some rather odd occupations: florists, painters and interior designers.

16 Chuck August 23, 2017 at 1:20 pm

Indeed. The higher profits could be the result of increased barriers.

17 derek August 23, 2017 at 12:57 am

Because there is no official filing requirement for the
privately held firms, our data does not include any privately held firms

I think this is the problem. There are almost two economies at play. Of the publicly traded firms I deal with they tend to have quasi monopolies due to size and reach. There was a very recent refrigerant ruling and the large public companies sided with the government to ban low cost commodity refrigerant in favor of more expensive and encumbered technologies.

So one side I see manufacturers and distributors, private ownership or equity, in a competitive market, vs the publicly owned.

So if the paper didn’t include the private, they are missing a very large part of the picture.

18 Robert Rounthwaite August 23, 2017 at 1:17 am

Imagine a world where a t-shirt costs the retailer $15 and it sells for $20. Markup is $5, 33%.
Now the t-shirt costs only $6. Markup is still $5, 100%
In reality, although the t-shirt costs less, the cost of labor and land and so-on goes up. As physical objects become cheaper and labor does not, isn’t this exactly what you’d expect? How much of what the authors describe could be due to this?

19 prior_test3 August 23, 2017 at 2:15 am

I can see you have never worked in retail – the mark up is 25%, of course. Because you use the retail price as the basis for the mark up percentage in any public discussion of your mark up.

The same applies to how retailers (and others) refer to their losses from something like theft – the public figures are always figured at retail prices, and never at the actual price paid by the retailer for the stolen goods.

It makes these sorts of discussions extremely hard to keep precise – after all, in just this example there is an 8% divergence in how to describe the mark up, even though we both agree that it is $5.

20 Andrew August 23, 2017 at 11:07 am

You’re incorrect, prior. 25% is the “margin”, 33% is the “markup”. I work in retail pricing- I’d not be caught dead mixing those two up.

21 Kevin Erdmann August 23, 2017 at 2:02 am

Oddly, mid cap stocks have outperformed large caps for the last 20 years or so, which seems odd if this has been a period of consolidation.

22 Hunter August 25, 2017 at 10:01 am

Not if the large caps were serial acquirers of midcaps and consistently paid premiums that were too high.

23 carlospln August 23, 2017 at 2:32 am

‘Or ask yourself a simple question – in how many sectors of the American economy do I, as a consumer, feel that concentration has gone up and real choice has gone down?’

What? No invoking airlines or Big Pharma?

UPSHOT: corporate profits as a % of [US] GDP are at an all time high [as is the case in Australia, as well]. For the lowly citizen, wages as a % of GDP are at an all time low.

Does this explain your penchant for obfuscation?

24 Anna August 23, 2017 at 2:47 am

The same applies to how retailers (and others) refer to their losses from something like theft – the public Future Technology figures are always figured at retail prices, and never at the actual price paid by Cancer Information the retailer for the stolen goods.

25 Millian August 23, 2017 at 3:37 am

As a consumer? How much of the economy is consumer-facing? What about freight, legal services? I doubt they’ve become more competitive and distributed. Media distribution?

26 Millian August 23, 2017 at 3:47 am

How expensive are the fixed costs really? At the margin, the fancy computer system lets you sell more. (If you’re just the Chinese restaurant, you don’t buy it.) Yes let’s do drive-by critiques, but shouldn’t we evidence our competing hypotheses?

27 Joan August 23, 2017 at 4:46 am

The civilian labor force has also gone straight upward and has increased more than the manufacturing output.

28 Potato August 23, 2017 at 5:54 am

Wall of text and no mention of the dramatic change of intangible assets as % of value ?

As a business dude, let’s get real. You can’t push the blame just on hospitals here.

1975: 17% of S&P value is intangible assets.

2015: 84% of S&P value is intangible assets.

That’s the story. Oligopoly, monopsony in labor markets, globalization, IP, network effects, choose your explanation. But that ain’t hospitals and education.

29 msgkings August 23, 2017 at 12:00 pm

+1

30 Chuck August 23, 2017 at 1:31 pm

Intangible assets are much harder to copy than tangible assets. The Chinese make everything under the sun, but have created few internationally recognized brands.

31 Millian August 23, 2017 at 2:25 pm

They are also incredibly valuable (companies with no assets like Twitter) until they aren’t (when people realise Twitter makes no money).

32 John de Rivaz August 23, 2017 at 6:21 am

With regards to “concentration”:

I have noticed how it is getting increasingly difficult to communicate with companies and other agencies. Many have the telephone call center as the **only** link with their customers, and that is irksome and expensive and time consuming to use. I suspect that this may be intentional. For example, the hold music is interrupted every 20 seconds by a mendacious speech recording that sounds as though an operator is going to speak, and then it is just some rubbish about the customer’s call being important. (If it was important they would have provided a proper telephone line with a person at the other end.) The purpose of this may be to prevent the customer getting on with something else whilst the music is tinkling away in the background.

Another thing I have noticed is that technology goods, such as TV tuners, (“set top boxes”) don’t have the maker’s name on them. This makes it almost impossible to contact the manufacturer if something goes wrong and you have lost the sales details. Sometimes even the instruction leaflet doesn’t have these details either.

33 Evans_KY August 23, 2017 at 7:06 am

Agriculture: produce, meat, eggs, dairy; Seed distributors; Trucking companies; Utilities; Energy; Prescription drugs; Hospital networks; Network television (local); Newspapers; Publishing; Music industry; Movie industry. In many sectors, we have moved from monopolistic competition to outright oligopoly. One or two producers distribute several different brands to the consumer.

“The problem with highly concentrated industries is that they have too much pricing power; they inhibit innovation; and they wield too much influence over policymaking. Consumer choice is a red herring…”
http://www.motherjones.com/kevin-drum/2017/08/oh-yes-american-industries-are-much-more-concentrated-than-they-used-to-be/

34 Slocum August 23, 2017 at 7:46 am

You see the effects of monopoly pricing power in the fading music, publishing, newspaper and local TV industries!? In a movie industry that struggles to fill seats and is widely expected not to survive in its current form? Or in the U.S. energy industry that has driven down the price of natural gas and of oil to the point of breaking OPEC? Really?

35 Tyler Cowen August 23, 2017 at 7:12 am

Many of you are spewing every possible complaint you might have about business, or the income distribution, and not focusing on what “mark-up” really means.

36 Potato August 23, 2017 at 8:22 am

Tyler,

I have no problem with business or the income distribution. And the simple monopoly model certainly does not fit the data, I agree.

Consider Walmart, which has done more for the poor of both the US and China than the government of either nation. The end result is high profits (low margin) and increased consumer surplus. However, the retail giant, due to economy of scale and leverage has decreased supplier profits down to almost zero. The textbook ideal competition is not at the distribution channel, it’s at the producer level. Wages at the domestic producer level fall as Walmart has/had de facto monopsony power.

Or network effects/expertise in navigating regulatory regimes/brand recognition. It is not a good sign for a truly competitive market (which we should all want) when 85% of the value of a firm is “intangible.” If it takes a world class legal team to keep your company from being sued into oblivion, if it is necessary to hire ex-federal officials to maintain good relations with the EPA, OSHA, etc then this needs to be addressed.

37 David R Henderson August 23, 2017 at 10:37 am

Tyler,
Good point.
Although I think most of the “spewing” would have happened anyway, you marginally contributed to it by using the term “rip-off.”

38 Slocum August 23, 2017 at 7:18 am

“Cable TV? Sort of,”

Not really. Netflix and Amazon offer very low cost streaming deals with a lot of much higher quality content than was available in the past. That’s the new cable. The old cable companies (and content providers that depend on them — ESPN particularly) are losing customers at a rapid rate.

39 Hoosier August 23, 2017 at 10:47 am

Getting a little bit sick of the ‘higher quality content’ line about Netflix and Amazon. It might be higher quality to the TV critics, but I wonder how many average Joes out there hold this opinion. The majority of the content out there is jaded, cynical, violent and/or highly politicized. It might be great writing, directing, the whole nine yards, but where’s the fun TV? The shows you can just tune on and spend a mindless hour enjoying the company of characters you know, with nothing serious to spoil the fun.

Big Bang Theory will never make any critics list of top shows on TV but its still one of the most popular shows out there. I don’t personally like this show, but I appreciate that TV is still putting out sitcoms that are there to just entertain. I don’t see that with the new OTT streaming services like Netflix and Amazon.

CBS isn’t cable of course, but depending where you live you may still need a cable subscription to watch (that’s the case for me) which is still crazy expensive.

40 Daniel Dostal August 30, 2017 at 11:10 am

> The shows you can just tune on and spend a mindless hour enjoying the company of characters you know, with nothing serious to spoil the fun.

Do not want. If a show isn’t engaging on some philosophical or identifiable way, then it isn’t worth our time. A mindless hour is better spent in meditation or mowing the lawn.

41 Floccina August 23, 2017 at 1:00 pm

In my area we now get 12 stations with an antenna. I only keep satellite TV because I am and NBA fan.

42 Hoosier August 23, 2017 at 3:07 pm

I get maybe only one broadcast network that I can consistently pickup. PBS comes in 100% of the time, which is great, but makes me wonder where they get the money for such a great satellite signal. Do the local stations even care? They’re not getting paid for it.

43 rayward August 23, 2017 at 7:21 am

An excellent critique by Cowen. I’m not sure we can accurately measure “costs”, whether fixed or variable. When Foxconn pays Apple’s affiliate in Ireland a fee for the license to use Apple’s intellectual property, what is that? Were GM and GE manufacturing companies or finance companies? When Google incurs enormous costs in developing technology for an autonomous vehicle, is that the kind of development cost for a new product (an autonomous vehicle) that should be amortized over a very long period or is it just a current cost of its advertising business that should be deducted currently? If financial data don’t present an accurate picture, how can economists reach macroeconomic conclusions from it? Heck, very few economists can see a bubble when it’s obvious, so why should we expect them to reach accurate macroeconomic conclusions from financial data they don’t understand? I suppose economists are like the weathermen (and women) on the weather channel: they know if it’s going to rain when they look out the window to see.

44 Brent Buckner August 23, 2017 at 8:29 am

I think Kurz on “surplus wealth” of firms is strongly suggestive of increasing market power over the period in question:
http://economistsview.typepad.com/files/formation-of-capital-and-wealth-draft-5-07-2017.pdf
[Hat Tip: http://economistsview.typepad.com ]

From the abstract:
“We first study all US firms whose securities trade on public exchanges. Surplus wealth of a firm is the difference between wealth created (equity and debt) and its capital. We show (i) aggregate surplus wealth rose from -$0.59 Trillion in 1974to $24 Trillion which is 79% of total market value in 2015 and reflects rising monopoly power. The added wealth was created mostly in sectors transformed by IT.”

45 Butler T. Reynolds August 23, 2017 at 8:51 am

I like to find online old Sears catalogs from my childhood years and prior. In another window I like to pull up an inflation calculator. If that calculator is delivering accurate results, it’s astonishing how much things cost decades ago. It makes me wonder about the profit margins on those items. It would seem that every step of bringing those products to the market had to have been much more labor intensive.

46 Brian Donohue August 23, 2017 at 9:21 am

Industrial Organization was one of my favorite undergraduate Econ courses. If the sheer fluidity of the economic landscape over the past 50 years isn’t enough to convince people that ranting about monopolies is way overblown (IBM?), maybe an understanding of the different behavior of a price leader versus a monopolist in terms of price, output, and welfare might be helpful.

It’s a jungle out there.

47 Noah Adam Yetter August 23, 2017 at 10:03 am

Firms do not know their marginal cost. How are these researchers claiming to know those MC values from *outside* the firm, with *less* information? I assume they didn’t just mean average cost (which is known), as that would be a freshman-level rookie mistake.

48 eric August 23, 2017 at 10:14 am

The market finds a way to keep profits up, in spite of the Marx’s prediction of falling profits. One thing missed is that for low marginal cost businesses, branding is very important, which creates an opportunity for market power. For example:

I remember about 25 years ago people predicting the demise of branded breakfast cereals and pop because such items were easy to imitate and had huge mark-ups. The businesses that dominate seem the same as always.

Expedia owns most travel websites (Hotels.com, Travelocity, Orbitz, etc.), and most porn sites are owned by MindGeek/Manwin, which was financed by a VC group to buy up most of its competitors. So, while these businesses have very low marginal cost, the fixed costs are high due to branding, so they can discourage entry, and keep their margins high.

I used to work at Moody’s, which is a simple business model in practice (evaluate firm, generate credit report), and markups were huge. The branding of the rating is worth more than the objective rating, in that Moody’s analysts are not that much better, or have some magical algorithm, that makes them better than a random analyst at any bank. When upstarts would rise up in various regions, they would buy them and say they were going to lever this new technology/idea/talent, and the new business would dissolve into the Borg with hardly a trace. Again, low marginal cost business.

49 Careless August 23, 2017 at 1:06 pm

I remember about 25 years ago people predicting the demise of branded breakfast cereals and pop because such items were easy to imitate and had huge mark-ups.

generic cereal seems to be slowly on the rise (while nowhere close to dominant) while generic sodas are not, but I’ve never tasted a generic soda that actually tasted like Coke

50 IO August 23, 2017 at 10:35 am

Tyler,

Why are these cross-sectional studies now becoming all the rage? See the one you discuss here and much (but certainly not all) of the work highlighted at this silly conference: https://research.chicagobooth.edu/stigler/events/single-events/march-27-2017 . Am I wrong to think this is all just warmed up Bain, an approach that has been discredited for 40+ years?

Doesn’t the Demsetz (1973) critique still apply (see Schmalensee (1988) for a broader discussion)? Concentration/market structure is an output of the competitive process. Markets are heterogeneous on a number of dimensions. If what we really care about is competition, cross-sectional studies just aren’t going to tell us very much, regardless of whether they measure concentration, profits, markups, etc.

51 Ed Chambers August 23, 2017 at 5:12 pm

^ most under-rated comment on this thread!

52 3rdMoment August 23, 2017 at 12:21 pm

I wish you had said more about whether we should trust their procedure for estimating markups. “Marginal cost” is not an item that we can simply read off the financial statements. Their method of estimating markup over MC contains many questionable assumptions, a point people miss when then just read the abstract.

Note that a simple aggregate measure of sales divided by cost-of-goods-sold does NOT show a big increase (figure B.5 panel b).

53 Mark August 23, 2017 at 12:36 pm

Word

54 Mark August 23, 2017 at 12:35 pm

The abstract says the increase in markup has beeh higher “in smaller firms”. Unless that’s a mistake in the abstract, I don’t quite see how broad inferences can be drawn about “market power”.

55 3rdMoment August 23, 2017 at 12:45 pm

To be fair, their headline numbers are based on weighted averages over firms (weighted by sales).

56 Mark August 24, 2017 at 9:04 am

Even so, if among the firms that are weighted in an average, it’s the smaller ones that are marking up the most, that confounds any thesis about market power.

57 celestus August 23, 2017 at 1:15 pm

“Or ask yourself a simple question — in how many sectors of the American economy do I, as a consumer, feel that concentration has gone up and real choice has gone down?”

I would posit that concentration and real choice have both gone up. The country where there was a small number of few-location businesses in each of hundreds of local communities has been replaced by a country with each community hosting a slightly larger number of nationwide businesses (or even the same number of nationwide businesses, but with greater product variety).

This sort of story seems to obviously hold for groceries, pharmacies (any retail really), the hospitals you mentioned, restaurants, hotels, airlines, banks…

58 celestus August 23, 2017 at 1:18 pm

And maybe it’s not obvious, but those nationwide businesses could very well have higher markups than the small businesses that came before, either because of economies of scale or because they just use a more efficient process (say JIT inventory).

59 Mark August 24, 2017 at 9:08 am

I was in Target Tuesday with my 18 year old son, filling in the last gaps in his dorm room stuff and he complained “there are too many choices!”

60 Lord August 23, 2017 at 1:51 pm

You have to worry about transfer pricing. Much manufacturing was off-shored but transfer priced at domestic production creating large international profits without impacting domestic prices that much. It is why international companies are so much more profitable. Many also produce giffen goods.

61 Potato August 23, 2017 at 5:18 pm

Name a giffin good please. One solid example.

62 Harun August 23, 2017 at 4:42 pm

Less middlemen. Used to be importer wholesaler distributor retailer

Now retailer imports directly from China.

63 Dan Culley August 23, 2017 at 10:03 pm

As celestus hinted at, it is perfectly compatible that concentration and markups could be going up, but output could be going up too. For example, a merger might lead to some additional market power, but it may be more than compensated for by reduced marginal costs. Accrue that across a bunch of industries, and labor’s share might go down, even though the absolute amount accruing to labor has gone up.

Not sure there is a reason to prefer a higher labor share of a smaller number.

64 o. nate August 23, 2017 at 10:29 pm

The rise of higher mark-ups, concentration, and market power has been predominantly in the “new economy” sectors of technology, social media, etc. as well as in older industries that have been particularly impacted by technology, such as finance and communications. Lots of this concentration has taken the form of mega-firms expanding nationwide and driving out smaller, local businesses. In the old days maybe the consumer had the choice of a couple of local businesses and the odd national chain. Now they have the choice of a few national chains. So the number of choices facing the representative consumer haven’t declined so much, but yet market concentration has increased.

65 pjcamp August 23, 2017 at 11:46 pm

Anybody who uses the term “government schools” is automatically self-invalidating. That is one of the best possible ways for you to scream “I AM A MORON!”

66 Careless August 24, 2017 at 12:49 pm

explain

67 Dan L August 24, 2017 at 9:39 am

Productivity growth + “nobody gets fired for buying IBM”. It’s that simple in the business space. Marketing 101, brand names can charge more.

68 Nathan Lazarus August 25, 2017 at 1:22 am

The fixed cost explanation is really flawed—it doesn’t match the data of larger firms within industries being the source of greater markups. Fixed costs impose a relatively large burden on small firms. Taking your Chinese restaurant example, a chain of Chinese restaurants can use one computer system. Why would the markups, if they were caused by computer systems, grow faster among the larger firms?

Additionally, the survivorship bias mechanism requires some heroic assumptions. If something is causing firms to leave the sample below a profitability threshold, and firm exits are up because many are falling below such a threshold, then mean profits would fall in the data (though the decline would be understated). No, for this to be operative, surviving firms would have to have been subject to different dynamics in profitability than exiting firms, in which case you’re just back at the superstar firms argument (and remember the cross industry uniformity, are superstars in every industry?)

Of course, this is all just an exercise because we know that concentration is the cause of decreasing firm listing (http://www.nber.org/papers/w21181).

69 David August 25, 2017 at 2:46 pm

If the economy is moving more toward monopolistic competition, then there would still be zero economic profits, which would be contradictory of the data provided by the authors. On the other hand, that model assumes free entry. Perhaps that free entry assumption is what should be questioned?

As for the concerns about markup over time with new products and firms: such measurements become much easier when weighting by market share and firm size, and when listing new firms only, as new firms have zero weight in the measure.

Tyler seems somewhat defensive in this post, asking about how I personally feel consumer choice has trended over the past many years. That seems like sidestepping the authors’ substantive contribution.

70 James Anderson August 27, 2017 at 12:57 am

Frankly speaking, I don’t think right now it is really anything big news. We just need to work out through proper way and method, as it is what will help and enable us to gain. I love it a lot with broker like OctaFX since they have brilliant set of schemes that counts at low spreads from 0.1 pips, high leverage up to 1.500, zero balance protection and then there is even 50% deposit bonus that’s usable, it really makes it all good.

71 Ed August 27, 2017 at 4:07 pm

Because like all answers, it depends? Were the markup inflation adjusted?

I have been thinking along this line for a long time with no answers. How do we price certain things? In Food Retail / Supermarket, the margin ( not markup ) is steadily raising from 30 to 40%, and in some cases 50 to 60%. The is only three main catagory, COGs, Rent, labour. COGs for most part, has been pretty stable for a long time*. But Rent and Labour keep raising. In some cases it is mostly just rent keeps going up.

Now consider a $0.5 bottle of water as Cogs, but your margin is 50% to cover your fixed cost. Some day those rental hike and salary increase would means you have to increase your margin. And a small movement of pricing, even $0.1 increase will make huge difference to %.

* Helped by lowering transportation cost due to lower Oil price and fierce competition in shipping industry.

72 Matt Young August 28, 2017 at 2:19 am

The mark up graph showing the rise in mark ups is nearly an exact match to the graph of federal interest charges. The reason is the theory of the federal price level by Sims. Margins compete, and the private mark up competes with the mark up on federal debt. Causality goes from increasing federal interest charges to increased monopoly in public companies. In a low volatility environment the convergence is fast.

73 Steve San Francisco September 2, 2017 at 1:09 am

You make a false equivalency between “markup on a single product” and “profit of a business unit” in your reasoning and then conflate that with class transfers of wealth It happens about mid way through the argument that leads you to make a logical fallacy of composition. Epipeen Profit or NiKie quarterly dividents and “Sales markup” on a single Epipeen or NiKie are not connected in many real world examples. You falsely assume what’s true for a single average product sale is true for all business sales. Treating a largely unequal data set as a homogenous average is the main problem I see in your logic. In your reasoning you’re using an average value for increasingly in-equal individual productivity and individual personal demand. In general there’s just a confusion introduced into the logical argument because “yes, you can increase markup and lose profit at the same time. You can also increase markup and go out of business because all things are NOT equal in the economy. And by “NOT equal” I mean that an average value for all things instead of a discrete examination of variation and variable counts would solve your logic flaws.

Sorry I think I’m repeating myself and just brainstorming and thinking out loud for you. Good luck with you strategy and argument. Consider my feedback please.

Thanks,
http://codeforsanfrancisco.org/projects/hOurs-Equals-Price-Project.

74 Steve San Francisco September 2, 2017 at 1:14 am

My opinion is there’s a third option not being considered.

The rise in markups seems to match the rise in wealth innequalty. capitalist market pricing theory predicts if you have a larger difference between rich and poor shoppers then you raise your price. There’s a big difference between a capitalist market where all your customers have exactly the same amount of money and supply vs a capitalist market where your customers are made of a few very very rich people and a lot of very poor people. Think about what happens as a retailer when you have a customer base of 1000 people who all earn $10/hr and how you price that product. Then think about what happens as a retailer when you havea customer base of 900 people who all earn $1/hr and 100 people who earn $900/hr. How does that change the most profitable price you want put on your price tag to make the most money as a retailer? A smart retailer would incrase the markup whenever innequality increases.

And that’s what I think is happening mostly, but the other things are probably happening too and the objections and alternatives presented in your link are worth consideration and probably valid as far as I can tell. I just think the natural profit seeking behavior of the retailer in a highly wealth innequality marketplace explains most of the data.

Comments on this entry are closed.

Previous post:

Next post: