Superstar firms and market concentration

A new paper by Autor, Dorn, Katz, Patterson and Van Reenen (some real heavyweights) rebuts the notion that market concentration is rising because of inadequate antitrust concentration:

The fall of labor’s share of GDP in the United States and many other countries in recent decades is we ll documented but its causes remain uncertain. Existing empirical assessments typically rely on industry or macro data obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of “superstar firms.” If globalization or technological changes push sales towards the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms, which have high markups and a low labor share of value-added. We empirically assess seven predictions of this hypothesis: (i) industry sales will increasingly concentrate in a small number of firms; (ii) industries where concentration rises most will have the largest declines in the labor share; (iii) the fall in the labor share will be driven largely by reallocation rather than a fall in the unweighted mean labor share across all firms; (iv) the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; (v) the industries that are becoming more concentrated will exhibit faster growth of productivity; (vi) the aggregate markup will rise more than the typical firm’s markup; and (vii) these patterns should be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.

Here is coverage from Peter Orszag.  As I’ve said before, people are opting for Philippon’s Great Reversal story because of ideology and convenience and mood affiliation, but it is not supported by the facts.

Comments

If true, shouldn’t this lead to rising overall productivity?

Peter Orszag:

"How can these observations be reconciled with the overall slowing of aggregate productivity growth? Either the effects aren’t that large, or they have been offset by the growing productivity gap between leading firms and others in each sector."

If the latter, it certainly shows the importance of good management. You don't become much more productive than your competitors by chance.

You don't become much more productive than your competitors by chance.

Sure you do. If two companies are working on a given innovation, which only the first one can patent, the question of which one of them gets it first may well be a matter of chance more than anything. Something similar goes for multi-sided platforms racing to reach the tipping point.

Where do displaced workers go? If it is to firms (or gigs) that do not enjoy "declines in the labor share," there is your answer.

'product market concentration will rise as industries become increasingly dominated by superstar firms, which have high markups and a low labor share of value-added'

So, when looking at Foxconn, where labor is a major part of the value added to the devices it builds, and Apple, which is not actually able to manufacture its products without a company such as Foxconn doing the work, how would the analysis work?

Or is Foxconn the true superstar, with Apple being more of a glittering PR machine able to capture high mark ups while creating its own walled garden?

Economies are zero sum, so labor share falls with easy money so profits rise funding debt (bonds) to allow workers/consumers to pay more than the earn to consume what they produce.

Consumers can not consume more than what is produced.

Producing more than is consumed,, ie bought and paid for, means warehouses filled with goods.

And building capital faster than its consumed will either reduce productivity, ie, factory utilization falls or workers/consumers buy lots more production, which might not be readily measured.

Ie, build better transportation capital so commuters are shorter in time, or longer in distance for constant time, thus growing a metro area increasing housing stock driving prices down to costs(destroying "wealth", putting large numbers of "owners" owing more than the price of substitute housing).

"Economies are zero sum": what on earth are you talking about?

Divvying up "shares" of income in zero sum.

My labor costs are zero, I should soon be the wealthiest person on earth.

From Orzag's:
"... industries concentrating faster are ones with faster growth in patents..."

Patents = monopolies

Patents should be shortened or eliminated in some cases

http://cepr.net/blogs/beat-the-press/patents-and-copyright-protection-racket-for-intellectuals

Your time horizon is too short and you have fallen victim to free lunch economics, ironically created by the architect of monopoly profits as a mandate of managers serving shareholders and screwing workers, customers, and society.

Give the monopolists three decades and they go bankrupt. I came of age before Milton Friedman had any real influence and the big corporations were dominant for 50+ years but provided shareholders rewards no greater than they provided workers, consumers, society. GE, Westinghouse, GM, were 50+ years old, and IBM was a big new kid. They were dominant and growing because they drove demand by putting money in consumer pockets by paying ever higher labor costs which forced up all labor costs putting more money in consumer pockets to drive higher consumer spending.

Since circa 1980, monopoly power by a few has allowed holding down labor costs while driving higher consumer demand for their goods, but starving other firms, breaking their monopoly power, then bankrupting them.

In 1980, Sears was the monopoly power, until say 2000 when it was bankrupted by monopoly power Walmart, until the present when the claim is Amazon is the monopoly power.

But remember, Sears was mail order for two decades before beginning to add stores to deliver faster to more -the Sears stores were doing what is "innovation" today in ship to store and easier returns, back in the 30s until 70s. Sears abandoned mail order because competing with home shopping networks would require Sears cut profits to innovate better "consumer experience" than paper catalogs. Ie, in 1970, going to Sears to look through 30 or so paper catalogs with the help of Sears order takers did not drive sales like watching TV and calling an order taker as the inventory counted down on your TV screen. And Sears selling special items in its stores required the long lead time of putting inventory in stores and hoping the customers for the Indiana store inventory weren't in Florida, a problem not had by home shopping networks.

Amazon has forced Walmart to do what Sears had to do in 1980 to survive by going back to the formula that made it big, the combo of mail order and retail store inventory.

Similar stories can be told for hundreds of firms that in 1980 were expected to dominate in 2030 and beyond. Instead, the focused on gaining monopoly power to drive profits at the expense of workers/consumers, which required they purposely did not innovate fast, but instead get patents in the hope of blocking change in consumer demand outside their control.

Ahh I totally agree with you. I was not clear on my previous comments.

The funny thing is that libertarians like Tyler are all for less government and regulations, but are ok with patents, which is basically more government and regulations.

The big companies I buy goods and services from tend to be lacking compared to smaller firms. We need to allow more entrants into staid industries like banking, telecommunications, and wireless.

As an example elsewhere to learn, Singapore is issuing digital banking licenses at the end of the year to allow companies and regulators to co-evolve the next paradigm in financial services [1]. The UK government may be Brexit-ing but at least they have a plan to make themselves the world leader in fintech [2]. The US unfortunately can only throw stones at attempts like Facebook's Libra. We still write checks and moving money from one account to another electronically still takes days. My Canadian, Aussie, European and even Chinese friends are laughing.

[1] https://asia.nikkei.com/Business/Banking-Finance/Tech-savvy-upstarts-race-for-Singapore-digital-banking-licenses
[2] https://www.gov.uk/government/publications/fintech-sector-strategy

"First, we provide microeconomic evidence on the evolution of labor shares at the firm and establishment level using U.S. Census panel data covering six major sectors: manufacturing, retail trade, wholesale trade, services, utilities and transportation, and finance."

With the exception of parts of finance, important industries where workers have more leverage like energy, tech, and healthcare are left out of their analysis.

How do they define “services”? Is it like a latte in the movie “Idiocracy”?

What makes Apple a superstar firm? The innovations or uniqueness of its products? The quality of its products? Why do consumers pay a higher price for Apple products (in comparison to comparable products of other firms)? Apple doesn't even make most of its products (although they are made to Apple's specifications). When Apple was identified as the poster child of American firms shifting production to China, instead of vilification Apple's executives were greeted as heroes by the Republican members of Congress. Why? Was it because they hold to the same economic ideology as Cowen and friends? Did they stop reading this blog after Trump was elected president and Trump threatened tariffs if Apple et al. didn't shift production back to America? Would Republican members of Congress greet Apple executives as heroes today?

Huawei is the Chinese Apple, its smart phones having passed the i-Phone as the smart phone of choice of the Chinese for reasons that mostly have to do with consumer (human) behavior. It appears that the high regard the Chinese have for Huawei products may not last, not because of the quality of its products but because of its conduct. https://www.nytimes.com/2019/12/04/technology/huawei-china-backlash.html One might distinguish the conduct of Apple (shifting production to China) and the conduct of Huawei (shifting employees to jail), the latter more egregious than the former. My point is that so-called superstar firms are a lot more vulnerable to shifting consumer preferences than their defenders appreciate.

Apple is the number one beneficiary of trade with China. Apple is also ironically the number one beneficiary of trade war with China thanks to Trump's exceptions tailor made for Apple. Regular people that don't run trillion dollar companies or lack friends in DC must pay these stupid tariffs.

So rather than anti-trust, the preferred solution would be more progressive taxation of the incomes generated by firms and overturning Citizens United?

I guess the answer from the Cowen perspective is there is no problem so no need to do anything. Nothing to see here folks.

The AIs that rule the earth in 2519 prefer it, and with a zero discount rate, we must support them!

Solution to what? What’s the problem statement here....

Of course, superstar firms are resistant to change (i.e., innovations), protecting that which made them superstars having the highest priority. Google is a superstar firm. It's primary business (based on source of income) is digital advertising; indeed, it generates more revenues from digital advertising than any other firm (Facebook is second). Google (and Facebook) achieved this status because of scale, and while Google (and Facebook's) share of the total revenues generated from digital advertising has slowly declined, it still maintains a big lead over other digital advertisers. Google's innovations have mainly centered on the accumulation and mining of data from users of its search engine, an innovation that some argue is not an innovation but a breach of trust. But data mining isn't Google's only effort at innovation, technology (software) for autonomous vehicles being the most recognizable effort. My point is that potential innovations by superstar firms such as Google often are removed from the superstar's core business. In other words, Google's near monopoly in digital advertising and the enormous revenues it generates as a result of that near monopoly funds potential innovations in a different line of business. One may question Google's choice (does Google pursue innovations in autonomous vehicles due to the vanity of its controlling shareholders?), but absent Google's near monopoly in digital advertising Google could not afford to pursue such innovations. Is this an example of the benefits of (near) monopoly?

Boy that is rife with internal contradictions. You are arguing that Google is resistant to change, and prevents change with all the innovation they do all the time. Ah..

Google's innovation in its core business (digital advertising) is data mining. Is that an innovation or is it an offense against Goggle's users? Where Google is attempting to achieve real innovations outside its core business (including the technology for autonomous vehicles) is likely to be its biggest contributor to progress. Absent a near monopoly in its core business and the enormous revenues it generates, Google couldn't fund such new ventures. Thus, I ask the question whether this is an example of the societal benefits of (near) monopoly? Getting from A (a monopoly in one business) to Z (funding entry into a different and innovative business) arguably supports Cowen's positive view of monopoly.

I think it's important to remember the sequence. Google revolutionized not just search, but the entire utility of the web, with page rank. For a long time they had no idea how to monetize that. They found advertising, which might seem obvious in retrospect. Still those two things do dovetail together. Search is when you find something you are looking for. Advertising is when you "find" something put in front of you.

Overall I still find it to be a good deal, for me, the consumer. I find what I'm looking for, and can ignore the often simplistic attempts to predict my future desires.

The founders of Google said they wouldn't take Google to the dark side, meaning advertising, because they understood what it would mean, Google's mission would be determined by ad revenues not navigating the internet. Alas, they (and their investors) couldn't resist temptation. Now, the more one uses Google, the lower the quality of the results; in the case of Google, one's history is an anchor. I use Google by default. I don't use social media by choice: it appeals to the worst of human desires. Rene Girard, and his acolyte Peter Thiel, have harsh judgments on their fellow human beings, judgments that are borne out by the conduct of the users of social media and the fortune Thiel has made. I'm an optimist, so I search for the good even if it is a product of the dark side, whether it's monopoly or exploitation of the worst of human desires.

Google's motto was famously "don't be evil." As early as 2004 they made clear that did not mean "don't advertise." More here:

don't be evil

Of course, if we move on from there there are things that might more realistically be termed evil. Telling lies for profit? Breaking user agreements for illicit data mining? People have done them, but I think I'd look more at Facebook than Google for that kind of villain.

Or neither company is a villain. This take is also known as reality.

The total victims of Facebook’s villainy are still trending at zero. Which is much less than a local municipal Police Department, or the average criminal.

There are actual villains in the world. It’s not Facebook.

Google is driving innovation in many sectors, including data center design, networking, network switch design (see Open Compute Project), OS (Android), chip design (see OpenTitan) and application software (think Chrome). YouTube is insanely popular (~20% of global Internet traffic), and has been pushing the use of the new QUIC transport protocol.

Superstar in the paper is defined as a high price cost margin firm. That measure is usually used to identify firms with market power in concentrated markets.

What is interesting to me is that some of the industries with the highest price cost margins are those which exhibited network effects, which indicate that their shares and margins are less subject to challenge from new entrants.

I am writing on an Apple Mac, all my apps and data are integrated across several platforms, and wonder...what is the future.

I was a Mac user from 1984 to 2000, a brief iPhone user, before Android. I used a lot of other platforms over time.

The interesting thing to me is that the youngest generations look to be iPhone for life. They take pictures. They buy more iCloud storage. They don't know what "backup" let alone "portable data" even mean.

I was a Mac user but an Apple stock pessimist. No more. Customer lock in is complete.

+1

There are completely valid antitrust concerns with walled gardens.

The first thing these 'superstar' firms do is prune their product lines and distribution to what can be automated and sold to similar buyers. Numbers look good but the economy, even the specific industries where they play require much more in terms of products and distribution, which then is serviced by typically private capital companies.

So I'd first make sure that the dataset includes these private firms.

As for impressions, remember that almost anyone writing about anything these days works for firms that are in process of major disruption. So a good rule of thumb is don't trust anything written in the media.

19 comments so far and it could already be one of my favorite comment sections of 2019. Warming up popcorn and hitting that refresh button like a madman. Gonna be a good day Tater.

"(i) industry sales will increasingly concentrate in a small number of firms; (ii) industries where concentration rises most will have the largest declines in the labor share; (iii) the fall in the labor share will be driven largely by reallocation rather than a fall in the unweighted mean labor share across all firms; (iv) the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; (v) the industries that are becoming more concentrated will exhibit faster growth of productivity; (vi) the aggregate markup will rise more than the typical firm’s markup; and (vii) these patterns should be observed not only in U.S. firms, but also internationally. "

almost all of these predicition will also occur if it is a question of inadequate antitrust concentration

Seems to me that many customers of the superstar firms hate those firms, and hate themselves for patronizing - starting perhaps with Microsoft and certainly including Walmart, Amazon, Apple, and Google, and undoubtedly including Facebook. Many more of the customers will use them out of laziness for the only game in town, but would switch in an instant without looking back.

I wonder if this was similarly true of GE, GM, IBM, Sears, etc. back in the day.

Color me unimpressed by these type of "papers".

Whether coming from the right or the left, the pattern is always the same: start with plenty of pre-conceived bias and define the result that's ideologically palatable to your donors and your base. Then go out and write a research paper where you, in completely intransparent fashion, get to cherry pick all the features, variables, and data sets that support your theory. You get to spend as much time to make the data meet your ends as you choose; preferably, make some opaque copy-paste and correlation: causation errors as necessary. Then publish the paper and let your fellow ideologists copy-paste and distribute at will.

Somehow this model is broken, no one with a brain will be convinced by any of this. We need a new paradigm for doing research!

What is interesting to me is that the folks at MR keep reposting these sort of farces. And said folks have university jobs, publish books, and write columns for major media.

I mean yeah, some of these paper are so blantatly slanted and deliberately mal-constructed to make me wonder if the whole thing is some kind of satirical exercise. But of course after years and scores of such papers seemingly endorsed here, the actual conclusion is pretty troubling.

The paper is one of many journal papers on market concentration and its effects. One data point, as it were. The authors are well respected in their fields.

I eagerly await the rebuttal paper by internet commenters BNM, George, et al.

Bah, the whole thing is build on a single premise that European anti-trust efforts are robust and effective. A premise they don't bother to prove. Yet without the premise, they have no paper.

I find that intriguing.

I look forward to your paper.

I should write a paper about yet another alleged academic study that wouldn't pass the standards for evidence of a high school debate club?

I might title it: Hand-Waving, Kabuki, and Smoke Machines: Simulacra and Shortcuts in the Ideologically Bespoke Economic Research Paper Racket.

We'd file it next to my other opus: The Results of Our Self-Investigation Absolved Ourselves, and Other Fairy Tales to Cut-and-Paste for the Gullible.

"I eagerly await the rebuttal"... That's not the point, really. My point was that this entire way of doing "research" is fundamentally broken, and the dysfunction is just another facet of the "fake news" problem, where there is no more baseline of plausibility for partisan work from either side. So my point is that papers like this are losing their efficacy vis a vis a general audience, and I'm pretty confident that George and I are not the only ones, and not the smartest ones, to think so.

Issues that divide macro-economists by politics:

Fed Policy
Budget Deficits
Minimum Wage
Trade Policy
Effect of Taxes on Incentives
Anti-Trust Policy
Wage Stickiness

On and on and on and on.

Macro is not a science. Sorry. It's Poli-Sci for people who can do math maybe. The study target is too complex. Put it with Climate Science and Dietary Studies.

Focus on bottom up things like education and sound institutions. The idea that macro-economists can engineer or optimize the economy is a bad joke.

Agree with most of this but I keep hope alive that Macro will be useful someday. What really annoys me is that some economists believe that Macro is all that matters (hi Mr Sumner).

Isn't macro basically a liberal arts degree for math people? It's like the sociology of human studies.

The findings in this paper are at least partly inconsistent with the MR view that monopoly power in the U.S. economy is not that big of a deal.

From the conclusion:

1. “Fifth, aggregate markups have been rising, but unweighted firm markups have not” (I have no idea what an unweighted firm markup is, but as I understand this, companies are charging more at a time when the best firms are becoming increasingly dominant).

2. “In its pure form, this “rigged economy” view seems unlikely as a complete explanation since the industries where concentration has grown are those that have been increasing their innovation most rapidly. A more subtle story, however, is that firms initially gain high market shares by legitimately competing on the merits of their innovations or superior efficiency. Once they have gained a commanding position, however, they use their market power to erect various barriers to entry to protect their position. Nothing in our analysis rules out this mechanism, and we regard it as an important area for subsequent research and policy (see Tirole, 2017; Wu, 2018)” (This isn’t definitive one way or the other, of course, but it recognizes the possibility that big firms may discourage competition; somewhat relatedly, I suspect that a similar study of billionaires would find that wealthy people have many avenues to distort politics besides crass measures of influence like campaign donations; if that is true, then contra Larry Summers, there might be a democratic case for a wealth tax).

3. “The rise of superstar firms and decline in the labor share also appears to be related to changes in the boundaries of large dominant employers, with such firms increasingly using domestic outsourcing to contract a wider range of activities previously done in-house to third party firms and independent workers. Such activities may include janitorial work, food services, logistics, and clerical work (Weil, 2014; Goldschmidt and Schmieder, 2017; Katz and Krueger, 2019). The apparent ‘fissuring’ of the workplace (Weil, 2014) can directly reduce the labor share by excluding a large set of workers from the wage premia paid by high-wage employers to rank-and-file workers. It may also reduce the bargaining power of both in-house and outsourced workers in occupations subject to outsourcing threats and increased labor market competition (Dube and Kaplan, 2010; Goldschmidt and Schmieder, 2017). The fissuring of the workplace has been associated with a rising correlation of firm wage effects and person effects (skills) that accounts for a significant portion of the increase in U.S. wage inequality since 1980 (Song et al., 2019)” (My non-technical read is that big firms may be bad for under skilled workers).

Personally, I’m in favor of successful businesses, and successful people, getting rich. But in a world where Jeff Bezos is worth $160 billion, and Amazon/Apple/Microsoft flirt with trillion dollar market values, it’s worth asking how much is too much.

Weighted markups take into account proportional sales volumes (company size). I do not know if using unweighted put the thumb on or takes it off the scale, but it tends to have a significant impact on the outcome.

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