Anyone who looks across the corporate landscape these days can’t help but notice that it is dominated by behemoths. Major media outlets have called attention to the high levels of concentration. Even John Oliver, host of Last Week Tonight, devoted most of his mid-September program to analyzing the issues. The persistent growth of these monopolies encroaches on every aspect of livelihood, from wages to housing, and therefore encroach on the rights of people not just as consumers, but as citizens and workers, as well.

In high technology, Microsoft, Apple, Intel, and Cisco dominate their markets. Together Google, Facebook, and Netflix own nearly all search data. In e-commerce and retailing, there are Amazon and Walmart; and in banking, JP Morgan Chase, Bank of America, Wells Fargo, and Goldman Sachs. Disney, Time Warner and Murdoch’s Fox, and again, Netflix, dominate the entertainment industry, as local TV stations continue to get bought up. Big pharma and a handful of major defense companies (107 defense companies consolidated into five during the 1990s) are controversial powerhouses. There are only four major airlines today, and Hertz, Avis, and Enterprise comprise almost the entire car-rental business. And on it goes. The Open Markets Institute, founded by Barry Lynn to “protect liberty and democracy in America from extreme concentrations of economic and political power,” records another 40 industries, from office supplies to cowboy boots, that are monopolized by a few firms.

How did market power in this country come to be centralized into so few hands?

We Used to Think Competition Was Good for Business

There was once a robust government effort to maintain competitiveness amongst firms, to have rules and institutions that keep practices—including pricing, wages, and investment—in line with social or economic norms. In fact, America’s antitrust legal framework reaches back more than a century: inaugurated by the Sherman Antitrust Act passed in 1890, it was updated under the Clayton Act in 1914, the same year as the inception of the Federal Trade Commission. To this day, the Department of Justice (DOJ) and the Federal Trade Commission are the two government agencies charged with maintaining competitiveness and scrutinizing proposed mergers. Their interventions were fundamental in a post-war institutional setting that allowed for a dramatic rise in standards of living and ensured that new and small businesses could survive. According to Lynn, “the great American middle class of twentieth-century America stood atop two foundations. One was freedom to organize the industrial workplace, to erect a ‘countervailing power’ within a necessarily hierarchical governance structure. The other was freedom from organization, the freedom to be one’s own boss, the freedom to build up a business that—thanks to anti-monopoly law—was largely safe from predation.”

In the 1960s and 1970s, these foundations gave way to a renewed and mostly uncritical faith in free market economics, which presupposed that the economy works best if intervention is minimal. Lina Khan of Yale University Law, along with co-author Sandeep Vaheesan, map the shift from free-market ideas to concrete and intentional legislative action that allowed a boom in anticompetitive business. During Reagan’s two terms, the antitrust powers of the agencies highlighted above were essentially slashed, and their laws were rewritten. Enforcement of, and updates to, antitrust legislation have taken a backseat since then.

In theory, Milton Friedman argued that monopolies may be more effective than government regulation at promoting socially responsible and economically optimal outcomes. But Republicans and free-market conservatives were not the only ones to encourage these developments. Back in the 1960s and 1970s, many liberals believed that America’s corporations needed to become large and dominate their markets in order to compete with overseas giants. Analyses by the great historian Alfred Chandler, the originator of many of today’s approaches to business strategy, praised big firms for their capacity to reach economies of scale and develop efficient managerial practices. Even the liberal institutionalist economist John Kenneth Galbraith saw value in the efficiencies of giant companies that could control the markets for their products, as long as government and unions served as countervailing powers.

The power attributed to firms during this time, and the use of this power to enact opportunistic political change, eg. through the use of lobbying for specific policies, paved the way for the continuing lax response to anticompetitive behavior we have seen in recent decades.

Five Trends in Corporate Concentration

The following trends were called to attention under President Obama’s Council of Economic Advisors (CEA), which documented the concentration of market power in 2016. The CEA found that the evidence is clear: monopolistic or oligopolistic (when a few firms dominate a market) structures suppress innovation, investment, and wages, and result in higher prices. The trends described in the report are:

1. Especially since the 1980s, there has been a persistent increase in industry concentration. Data represented below shows the percentage-point change from 1997 to 2012 in the share of revenue in each industry that is captured by the largest firms. The most rapid gains in concentration include retail, transportation, and finance.

Figure 1

2. Returns on invested capital (ROIC) of top publicly traded nonfinancial U.S. firms has grown dramatically since the early 2000s. These firms’ highest returns (top decile) have seen a 400-percent increase in returns in the past thirty years. While these firms started on a more equal footing, they now earn nearly five times more than firms with median returns, while firms at the median have experienced stagnating returns during the same period.

Figure 2. Return on Invested Capital Excluding Goodwill, U.S. Publicly-Traded Nonfinancial Firms, 1965-2014

3. According to the CEA analysis, the ratio of new businesses to existing ones, or the firm entry rate, has been declining since the 1970s, which can result in a reduction in competition. The decline is stark—from 17.5 percent in 1977 to a thirty-five-year low of 8 percent in 2008, with negligible recovery since then. The trends loosely follow business cycles, but never fully recover to former levels. A decline in the entry rate of new businesses was seen in all industries over the 2000s, including high-growth sectors such as high technology.

This trend supports the thesis that dominant firms cut costs aggressively but also often raise prices. As evident in the cases of Amazon and Walmart, and in contradiction to standard economic theory, low costs have actually proven to make it more difficult, and not easier, for new firms to enter the market and compete. Barriers also come from certain rules and regulations, such as required legal permits and licenses to operate, which add costs to starting a business. Furthermore, strict intellectual property rights constrain new innovations if pieces of a new solution are locked away under law, and allow the rights’ owners to raise prices while still fending off competition.

The consequences can be high. Businesses are often founded based on new products or services, and further innovations come once the company is up and running. A decline in startup activity means a loss in innovative products and solutions as well as in employment for high- and niche-skilled workers. A loss in momentum in the high-tech sector has contributed to a slow-down in growth, productivity, and STEM employment during the 2000s.

Figure 3. Firm Entry and Exit Rates, 1977-2013

4. Labor market dynamism—the ease and frequency with which workers change jobs—has also declined dramatically since the 1980s, in part due to lack of competition and drops in firm entry rates. Inter-state and inter-county migration dropped by half between 1980 and 2010. The CEA reports that some firms collude with each other about wages and employment, sometimes informally, and sometimes explicitly, for instance in the case of Silicon Valley firms who agreed not to hire each others’ engineers. Recently, it has been reported that even fast-food chains collude in an agreement not to hire each other’s workers. There are an increasing percentage of employees who sign non-compete agreements and the number of workers with occupational licenses has grown five-fold in fifty years. These laws protect incumbent workers to the detriment of others and the economy as a whole.

5. Increasing merger activity births increasingly giant firms. The CEA reports that the proportion of reported mergers with a value greater than $1 billion increased from 6 percent to nearly 15 percent from 2000 to 2014. The seven largest mergers of all time have taken place since 2000.

How Concentration Hurts Workers and Industries

Several studies by mainstream economists have turned up persuasive evidence that business concentration is harming workers, innovation, and investment.

Using a model of markups, which shows how much revenue from a good sold surpasses its cost of production, Jan De Loecker and Jan Eeckhout find causal pathways between increasing market power and seven main macroeconomic outcomes:

  1. Decrease in labor share;
  2. decrease in capital share;
  3. decrease in low skill wages;
  4. decrease in labor force participation;
  5. decrease in labor flows;
  6. decrease in migration rates;
  7. slowdown in aggregate output.

In each case, the authors show that these negative impacts are the strongest in industries where market power is the most concentrated.

Explosive inequality in America is linked to increasing rents, or “beyond-normal profits,” of top firms. Jason Furman, former head of the CEA and now at Harvard’s Kennedy School, and Peter Orszag, former head of the Congressional Budget Office, show that these returns accrue disproportionately to already well-off firms. Above-normal returns accrue largely to firms that are equipped with resources, and this contributes to rising inter-firm inequality, in which some firms can provide high wages and others cannot. They refer to research performed by the London School of Economics that shows that most of the rise in inequality in recent decades is due to this inter-firm disparity. Firms’ benefit structures are also not off the hook. Firms that reward managers and CEOs through equity and bonuses allow top earners to make more, and in general, benefit structures have increasingly rewarded those at the top 1 percent of the income distribution, a group whose share of total income rose from 8 percent in 1970 to 17 percent in 2010, a trend that has only continued.

An interesting case study outlined by Furman and Orszag in their report describes the impact of construction industry concentration on housing rental prices. Concentration in this industry allows companies to charge more, given that there is no competition nearby. Landlords, when paying higher prices for the same goods and services from construction companies, may then pass the increased cost to renters. Therefore market power consolidation has contributed to the up-swing in rental prices, they argue, making it difficult for wage earners to keep up with the cost of living. Increasing rental prices impact firms, their employees, and customers, too. If firms are able to pay the higher rental prices at all, they may cope with the expense by raising prices on their products, hurting consumers, or by cutting back wages or benefits. This shows that there are indirect and inter-industry costs of market concentration as well, whereby firms that do not intentionally raise prices or cut back wages are forced to do so just to get by.

Firms who are on the winning end of the market power game have been called “superstar firms.” David Autor of MIT and co-authors, who coined the term, provide evidence that confirms their “superstar firm hypothesis” to be true: the concentration of sales revenue to a few firms in each industry has increased, and the trend is “remarkably consistent…in each sector.” In manufacturing, the percent of all sales in the industry that went to the top four increased from 38 percent to 43 percent from 1980 to 2010; the top four financial firms took 24 percent of sales in 1980 and 35 percent in 2010; in services, from 11 percent to 15 percent; in utilities, from 29 percent to 37 percent; in retail trade, from 15 percent to 30 percent; and so on. Most telling, Autor et al. find that as these giant firms increase their sales, they do not increase employment opportunities at the same pace. In other words, we don’t see a trickle-down of the benefits of firm expansion to workers. Further, they determine that these patterns are observable across firms internationally. The lack of action against increasing market power in America will have similar impacts on economic outcomes in nations across the world.

How to Rein Companies In

Matt Stoller, a fellow at the Open Markets Institute, calls for an antidote: “The government has a powerful but underused tool to boost productivity and innovation, one that’s nearly a century old: its antitrust powers… [F]orce companies to compete with each other to produce better products and services.”

Some recent high-profile antitrust actions have showcased what legislation can do. For example, the E.U. fined Google billions for anticompetitive manipulation of their own search and shopping services. In the U.S., the DOJ’s Antitrust Division blocked the merger between AT&T and T-mobile in 2011, and, as of September 2017, is reviewing the potential union of AT&T and Time Warner. But, according to the CEA, other than a few major cases (some of which were not even tackled by U.S. courts), there has been no serious crackdown on this activity in the U.S. The number of requests for information that allow authorities to determine whether a merger may harm competition has been relatively stable during the 2000s, despite a period of dramatic increase in M&A activity; and the DOJ cleared most of the mergers within a quick thirty-day period.

In April 2016, the same month as the CEA report was issued, Obama’s executive order spoke out “against unlawful collusion, illegal bid rigging, price fixing, and wage setting, as well as anticompetitive exclusionary conduct and mergers”—anticompetitive practices that the order says erodes the foundation of America’s economic vitality. “We did see a slight uptick in enforcement” under Obama, said Diana Moss, president of the American Antitrust Institute. But, she added, any hopes that “there would be more aggressive enforcement” were met with disappointment.

Likewise, Democrats currently have included antitrust in their A Better Deal platform, which aims to “prevent big mergers that would harm consumers, workers, and competition, require regulators to review mergers after completion to ensure they continue to promote competition, [and] create a 21st century ‘Trust Buster’ to stop abusive corporate conduct and the exploitation of market power where it already exists.” But many details regarding measurement, implementation, and enforcement—the heart of any policy platform—have yet to be determined. Additionally, critics of the platform argue that mergers need to be scrutinized before, rather than after, they are approved: the Democrats’ plan for stricter post-merger rather than pre-merger review can be a gateway to a continuation of the consolidation of wealth and power that led to the outcomes described above. Further, the platform singles out the airline, beer, food, and telecom industries, which shows they are most concerned about industries where price increases have been significant enough to attract consumer attention. But as we have seen, anticompetitive practices affect investment and productivity as well, the very cornerstones of economic growth.

A Better Deal refers to Teddy Roosevelt, Republican and, later, third-party candidate for president, who was known as “the trust buster” during the era of new big oil and manufacturing giants. Will a new Teddy Roosevelt step forward? Senator Elizabeth Warren may be a leading candidate to fulfill the role, and there have been reports of bipartisan support gathering behind her, but under a Republican presidency and Congress, it is unlikely she or others will gain serious traction soon.