Words of wisdom, man the rooftops

While the prediction that rising market toughness could generate an increase in concentration and the profit share may seem counterintuitive, the ambiguous relationship between concentration, profit shares, and the stringency of competition often arises in industrial organization.

That is from Autor, Dorn, Katz, Patterson and Van Reenen.  In essence, rising market toughness reallocates a greater share of output toward highly productive superstar firms, which are more productive but also have higher fixed costs and mark-ups over marginal cost.

Have you ever wondered how “rising Chinese competition devastated parts of the American working class” and “market power is up” both could be true?  Well, this paper is the best available attempt to square that circle.  Market power is up as measured by price to marginal cost ratios, or concentration ratios, but in fact competition is much tougher than it used to be and the antitrust authorities should not (at least in this regard) be blamed for their laxness.

Very few people have put in the time to understand this point, which I should add comes from some of the top IO economists in the field.

Have I mentioned that changes in concentration are correlated with the most dynamic economic sectors?


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