Sarah Travers
As the post-pandemic economy takes shape, concerns are growing over the threats to sustained economic growth. Despite a temporary boost from stimulus packages, productivity growth remains sluggish, and the wages share of the economy lingers near record lows in many developed nations.
Economists are now pointing to the growing dominance of a few mega-firms, especially in the tech sector, as a significant factor stifling economic progress.
The Era of ‘Superstar’ Firms
Leading this investigation is Jan Eeckhout, a prominent economist from Pompeu Fabra University in Barcelona. Eeckhout and his team meticulously examined US data dating back to the 1960s, focusing on mark-ups and profits of American firms. Their findings reveal a notable shift in the market landscape since the early 1980s. In the past, mark-ups remained stable at 20-30% above production costs, but they have now surged to approximately 60%.
This increase in market power is not confined to the United States alone. Eeckhout’s global data set of around 70,000 firms shows a similar trend worldwide. He labels these companies as “superstar” firms, raking in substantial profits while most other firms struggle to match the performance seen in the 1980s.
Culprits of Market Dominance
Eeckhout identifies three primary factors contributing to this shift: weak competition law enforcement, globalization, and technological advancements. The rise of tech giants is especially concerning due to their ability to establish monopolies and oligopolies, facilitated by high start-up costs and low production costs. This dynamic creates a winner-take-all scenario in the digital age, where a few firms dominate entire sectors.
Ross Garnaut, an emeritus professor of economics, adds that the internet era has intensified this phenomenon, especially outside the US, where tech giants predominantly operate. This shift has resulted in a significant increase in the share of the economy occupied by sectors where rents play a substantial role, contributing to stagnant economic growth and wages.
Impact on Consumers and Competitors
The growing dominance of superstar firms not only raises prices for consumers but also suppresses wage growth. It leads to reduced innovation, less business dynamism, and diminished job switching, potentially causing a misallocation of skills and declining productivity.
Additionally, the concentration of market power weakens the effectiveness of interest rates in containing inflation. Large firms with high mark-ups are less responsive to interest rate changes, burdening smaller, low mark-up firms and exacerbating economic inequalities.
Breaking the Vicious Circle
To address the issue, economists propose improved competition policy and stricter enforcement of existing laws to break the “vicious circle” of market power. The concern is that powerful firms can influence policies and legislation in their favor, further entrenching their dominant positions.
Professor Eeckhout suggests implementing a super profits tax on dominant firms, potentially improving competition, lowering tax burdens elsewhere, and enhancing overall economic welfare. This measure could help redistribute wealth and level the playing field.
Shifting the Tax Burden
Professor Garnaut emphasizes the need to shift the burden of business taxation away from competitive firms and towards those that thrive on economic rent. Specific proposals include immediate expensing of all capital expenditure and denying interest deductions to incentivize investment and innovation.
Furthermore, denying tax deductions for imported services not directly linked to provision in Australia could counter income shifting by multinational companies, ensuring a fairer distribution of profits and encouraging domestic investment.
A Balancing Act
While the dominance of superstar firms raises concerns about the economy’s future, striking a balance between fostering innovation and ensuring fair competition remains a challenge. Implementing effective policies to address market concentration and its effects will be crucial for sustaining economic growth and prosperity in the years ahead.
As economists continue to explore solutions and policymakers grapple with the complexities, the fate of the global economy hangs in the balance, awaiting a decisive response to the rise of superstar firms.
