I recently met a young historian who teaches at a leading business school. In the course of our chat, I asked whether he had gotten to know anyone in his university's renowned economic history department. To my surprise, he responded in the negative. The economists and the business historians, he said, don't have much to do with one another.
That conversation stuck in my mind as I read Thomas Philippon's fascinating book, The Great Reversal. Philippon, a finance professor at New York University's Stern School of Business, makes a compelling case that competition has declined across the U.S. economy over the past two decades, with regrettable consequences. Unfortunately, Philippon bases his analysis entirely on econometric studies: almost every work cited in his lengthy bibliography is either an economics working paper or an article in an economic journal. By ignoring the very rich historical literature on competition and market power, he omits important historical perspectives that could have made this a richer and more appealing book.
Philippon marshals several types of evidence to support his claim that market power has strengthened. Prices of some important products—airline flights, mobile phone calls, broadband Internet service—are higher in the United States than in many other countries, notably those in Europe. In many industries, the Herfindahl-Hirschman Index (HHI), which measures concentration by squaring the market shares of the firms in the industry, is on the rise. The persistence of high corporate profits (at least prior to the outbreak of the COVID-19 pandemic), whether measured by various ratios or by the amounts companies pay out to shareholders through dividends and share buybacks, hints that many firms may face less intense competition than they used to. As Philippon puts it, “The fact that payouts have increased suggests that many firms feel like they have a lot of cash to spare” (p. 58).
There are complications with each of these measures; the HHI for food retailing, to take one example, is hard to interpret when supercenters, drugstores, dollar stores, gas stations, meal kits ordered online, and prepared meals delivered by DoorDash all offer food for at-home consumption in competition with grocery stores. More consequential, but even harder to measure, is that technology has blurred the lines between product categories. Honeywell and Google both sell household thermostats, but while Honeywell may seek to maximize profits from thermostat sales, Google may be more interested in targeting ads more precisely using information that its home automation systems collect about their owners. Whatever the HHI, these firms may not share an interest in raising thermostat prices.
Despite such complexities, Philippon's evidence that firms in many industries are exercising greater market power is very strong. He links that situation to the declining rates of new business formation and public stock offerings and the greater number of corporate acquisitions. One notable omission from his list of relevant factors is the increasingly complex relationships among firms. The Wall Street Journal reported in 2017 that Samsung, the Korea-based electronics giant that supplies parts to Apple, was expecting to collect more revenue from each Apple iPhone X than from each Galaxy 8 phone manufactured by Samsung itself (Timothy W. Martin and Trip Mickle, “Why Apple Rival Samsung Also Wins if iPhone X Is a Hit,” 3 Oct. 2017). How does this relationship between the two companies, simultaneously friend and foe, affect competition in the smartphone market? Such questions may be better answered by case studies than by quantitative analysis.
Perhaps the most novel part of The Great Reversal is Philippon's analysis of the implications of greater market power. “The consequences of a lack of competition are lower wages, lower investment, lower productivity, lower growth, and more inequality,” he asserts (p. 10). In popular discussion, the market power of high-tech firms is justified by their contributions to the U.S. economy. Philippon demonstrates in a lengthy table that this argument is fallacious (p. 246). “The defining feature of the new stars is how few people they employ and how little they buy from other firms” he writes, adding that “Facebook, Apple, Google, and Microsoft are smaller than the star companies of previous decades. When their productivity increases, it has less of an effect than similar productivity increases at GM once had” (pp. 256, 258). The current stars’ pretax profit margins, he adds, are similar to those of stock market stars of earlier years; what distinguishes them is their much higher after-tax profit margins, a function of tax policy rather than productivity.
Philippon's analysis becomes more problematic when he wades into the political economy of regulation and antitrust enforcement. Here, he ties lobbying expenditures and campaign contributions to weakened merger enforcement and regulation. In addition to drawing on published economic research, he presents his own findings that companies use state-level campaign contributions to shield themselves from future nonmerger antitrust enforcement. The import of these findings is not clear; in this century, the number of state-level nonmerger antitrust cases in any year has never been large, and it is not obvious that firms can predict in an election year that they might be subject to a particular state's antitrust enforcement activities three or four years down the road. Philippon ignores the extensive historical literature on merger enforcement. He also ignores the likelihood that enforcers see little reason to bring antitrust cases when judges, indoctrinated by scholars of law and economics who teach that antitrust concerns are largely illusory, will throw their cases out of court.
Nonetheless, Philippon has broken important ground. His fundamental point—that is, “when competition weakens, capitalism loses much of its appeal”—should stimulate discussion across the political spectrum (p. 23).
