In this installment of ProMarket’s new interview series on concentration in America, Chicago Booth professor emeritus Sam Peltzman shares some thoughts on concentration and antitrust policy. “It is hubris to believe that economists and antitrust officials can predict the future. Who remembers that free web browsers were once thought to be a dangerous threat to competition?”
Does America have a concentration problem? On March 27-29, the Stigler Center hosted a first-of-its-kind, three-day conference in Chicago that focused on this very question.
The conference brought together dozens of top academics from law, economics, history, and political science, policymakers, journalists, and public intellectuals. Ahead of this conference, we presented influential scholars and thinkers with some questions on concentration, market power, and bigness—and their potential effects on the U.S. economy.
You can read all previous installments here.
Sam Peltzman is the Ralph and Dorothy Keller Distinguished Service Professor Emeritus of Economics at the University of Chicago Booth School of Business. He has been on the faculty of the University of Chicago’s School of Business since 1973, and has also served as a senior staff economist for President Nixon’s Council of Economic Advisers (1970-1971).
His research has focused on issues related to the interface between the public sector and the private economy and encompasses areas as varied as the economics of government regulation and industrial organization, including the regulation of banking, automobile safety, pharmaceutical innovation, the growth of government, the political economy of public education, and the economic analysis of voters and legislators. Peltzman is also the Director Emeritus of the Stigler Center, which he headed from 1991 to 2005.
In a brief interview with ProMarket, Peltzman shared some thoughts on concentration and the U.S. economy.
Q: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?
There are two questions here. We have enough evidence that concentration has increased in recent years. The best data are for manufacturing. I’ve documented the trends in that sector in a 2014 article in the Journal of Law and Economics. Briefly, concentration began rising in this sector in the late 1980s and continued doing so for the next 20-25 years. This process may still be going on. While the data for other sectors is not so good, it is likely that concentration in sectors such as retailing and services has also increased over roughly the same period.
We do not have enough evidence that this process is having adverse effects on the economy. There are some retrospective merger studies that tilt in that direction. But they are focused on a few industries. And there are many ways beyond mergers that concentration increases. There is simply no broad base of evidence that the rise in concentration has had adverse—or beneficial— effects on the economy.
Q: In your opinion, what are the main reasons for the rise in concentration?
Again, we don’t really know. The timing of the upward trend (beginning in the 1980s) makes it tempting to implicate the relaxed antitrust policy toward mergers, which was formalized in the 1982 merger guidelines. Perhaps there is something to such a connection. But the trend is pervasive and not driven exclusively by mergers.
This raises the possibility that larger scale has just become a more efficient way of doing business. That possibility may, in turn, be related to evidence that the economy has become less dynamic, in the sense that job turnover has been historically higher for small firms than for large, so the reduced turnover seems to signify less innovation and risk taking by small firms. That can be both a symptom and a cause of growing concentration.
Q: Which industries should we be concerned with when we look at questions of concentration?
The traditional answer, embedded in the merger guidelines, is “be concerned if concentration increases in an already concentrated industry.” The evidentiary basis for this is thin. A much older literature struggled vainly for years to find a broad pattern whereby adverse effects of concentration could be localized to highly concentrated industries. I am unaware that the state of knowledge on where we should be concerned—or indeed if we should be concerned—has improved much. Basically, antitrust policy relies more heavily on beliefs rather than a strong consensus about facts.
Q: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?
I don’t know, but my guess would be ‘no.’ The question suggests that perhaps smaller firms have had increased difficulty in raising capital. That remains to be demonstrated. There is, to be sure, a regulatory issue in that Dodd-Frank rules make it harder to grant ‘character’ (unsecured) loans and to avoid writing them down when they stop performing. This can’t help someone with little more than a good idea and a willing banker.
Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?
See my answer to question 3 above. It is hubris to believe that economists and antitrust officials can predict the future, which is what you need to do in this sector. Who remembers that free web browsers were once thought to be a dangerous threat to competition?
Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?
The timing suggests so, but there are a lot of
unconnected dots in this question. We do know that wage inequality across firms has increased. Larger firms have always paid more. That premium has increased. That may be symptomatic of the ‘larger firms are more productive’ view raised above in question 2.
Q: President Trump has signaled before and after the election that he may block mergers and go after certain dominant companies. What kind of antitrust policies should we expect from him? Pro-business, pro-competition, or political antitrust?
See question 5 above. I prefer humility to hubris.