Tag Archives: corporate concentration

It’s Complicated

The usual reason economists oppose monopolies is that when a business effectively dominates a particular market, it is able to raise prices. A monopoly has effectively eliminated the competition that keeps prices low. The higher prices harm consumers, and allow the company to rake in more profit than it would otherwise be able to generate.

One of the criticisms of the current administration (a criticism that tends to get lost among the mountain of others) is that enforcement of anti-trust laws has been somewhere between lax and non-existent.

Despite their almost-universal support for vigorous anti-trust enforcement, however, few economists identified a relationship between monopolies and the growth of  inequality. As a post from Inequality.org informs us, that may change.

Andrew Leigh is both a member of the Australian Parliament and an economist, and his recent research is making waves.

Working with a team of Australian, Canadian, and American analysts, he’s been studying how much the prices corporate monopolies charge impact inequality.

The conventional wisdom has a simple answer: not much. Yes, the reasoning goes, prices do go up when a few large corporations start to dominate an economic sector. But those same higher prices translate into higher returns for corporate shareholders.

Thanks to 401(k)s and the like, the argument continues, the ranks of these corporate shareholders include millions of average families. So we end up with a wash. As consumers, families pay more in prices. As shareholders, they pocket higher dividends.

But this nonchalance about the impact of monopolies, Andrew Leigh and his colleagues counter, obscures “the relative distribution of consumption and corporate equity ownership.” Average families do hold some shares of stock, but not many. In the United States, for instance, the most affluent 20 percent of households own 13 times more stock than the bottom 60 percent.

In other words, when prices rise, low- and middle-class families pay and wealthy families profit. According to Leigh and his fellow researchers, this redistribution from the less affluent to the wealthy via corporate concentration has shifted 3 percent of national income out of the pockets of poor and middle-class families and into the wallets of the affluent.

The research also shows that corporations grow large because there are incentives to growth to which their executives respond.

Indeed, firm size determines how much executives make more than any other factor, as research has shown repeatedly over the years. Executives don’t have to “perform”— make their enterprises more efficient and effective — to make bigger bucks. They just to need to make their enterprises bigger.

Executives, in short, have a powerful incentive to grow their companies, and that powerful incentive, as the latest research from Andrew Leigh and his colleagues shows, isn’t just making these executives richer. It’s leaving our societies much more unequal.

An obvious lesson from this research is that we need much more robust anti-trust enforcement. Another remedy, just now being tried, is a requirement that corporations publish the  pay ratio between their CEOs and their workers. (Portland, Oregon imposes an “inequality tax” on companies reporting too wide a disparity.)

Evidently, size does matter–at least, in corporate America.