The cost of market concentration

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Technological progress and lax antitrust enforcement have led to high market concentration, which in turn led to ballooning profits of some big corporations, to the detriment of economic development, economics professor Jan Eeckhout told EURACTIV in an interview.

He estimated the cost of market power at around 8-10% of GDP in the EU and argued for more resources for anti-trust enforcement bodies.

But let’s start at the beginning. “Corporate profits have been on the rise since the 1980s in the EU and in the US,” Eeckhout told EURACTIV.

The author of a recent book on the rise in profits explained, however, that this was not the case for all firms. Instead, a small number of large corporates increased their profits by a lot, while profits for the average firm stagnated.

Technology-enabled monopolies

Eeckhout sees two reasons for this development. On the one hand, there was a change in how anti-trust was enforced, “but when we quantify it, we find that technological change is the really big driver”.

The digital technologies developed from the 1980s onwards particularly allow for massive economies of scale, which favour the creation of monopolies.

“And it’s the lack of competition that is really behind this gain in profits,” Eeckhout said, adding that this could be observed not only in the tech industry but also in many other sectors, for example the textile and the beer industry.

“In fact, we see that in nearly all the sectors one or a few dominant players are getting a dominant position due to these returns to scale.”

Usually, such a competitive problem would have to be solved by antitrust policies. In the EU, there is some awareness of the problem, especially in the digital sector, as evidenced by the recent agreement to introduce the Digital Markets Act (DMA), which should reduce the market power of some digital gatekeepers.

“Not enough resources”

“Anti-trust is completely inadequate in responding to that. Not because the legislation is not there, but because there are not enough resources,” Eeckhout said, arguing that the problem of market concentration was everywhere but the resources of competition authorities were too constrained to do much against it.

“They are just so thinly spread that there is basically no chance that they can effectively tackle these problems.”

Meanwhile, the cost of market concentration for the economy is considerable. Depending on the model one uses, the high prices enabled by market concentration cost the economy as much as 8-10% of GDP.

At the same time, Eeckhout said, inflation would cost the economy only about 0.5% of GDP.

He compared the institutional apparatus that the EU and the US put in place to control inflation to the relatively few resources spent on fighting market concentrations.

The European Central Bank (ECB), for example, has a staff of more than 3,500, while the EU Commission’s directorate-general for competition has about 850 employees.

The pattern is even more pronounced in member states. In the German central bank, for example, there are more than 10,000 employees while the national competition authority employs about 400 people.

Of course, central banks do not only work on fighting inflation, but also control financial institutions. These numbers are thus difficult to compare.

Nevertheless, if the costs that result from market concentration really are somewhere near the estimated 8-10% of GDP, there is a good economic case for substantively increasing resources for competition enforcement.

Chart of the Week

Bitcoin enthusiasts are having a tough week, following an even tougher past six months, with the value of bitcoin collapsing by more than a half from its peaks in November 2021, as the chart below shows.

The sharp fall of the bitcoin price does not necessarily spell doom for bitcoin. The price rally from summer to autumn 2021 showed that bitcoin can recover from these depths.

Graph by Esther Snippe

Along with the bitcoin price, something else collapsed during the past six months: The myth of bitcoin as an inflation hedge.

For many bitcoin believers, bitcoin was seen as a way to secure themselves against what they perceived as reckless money printing by the central banks, which, in their mind, would have to result in catastrophic inflation.

They saw the “apolitical” bitcoin, the maximum supply of which is fixed for all eternity, as the ideal counterweight to hedge themselves against central bank policies.

After a long period with practically no inflation, in the past months, prices skyrocketed. In April, year-on-year inflation reached 7.5%. Consumers can buy substantively less with their euros than they could a year ago.

It was the perfect moment for bitcoin to prove its value as a safe haven for investors and savers who are afraid of inflation.

Alas, the bitcoin price collapsed and the proof did not materialise.

Of course, if you had bought bitcoin in 2015, you would still be much better off with your bitcoin today than if you had just kept your euros in a bank account somewhere.

However, this still does not make bitcoin an inflation hedge, but a speculative asset, and a very polluting one at that, considering the massive amounts of energy needed to keep the bitcoin system running.

Whatever use case bitcoin might turn out to have in the future, a hedge against inflation will probably not be one of them.

Literature Corner

Cautionary Tales from Cryptoland: This week was not only bad for Bitcoin, as there seem to be increasing turbulences in the crypto markets. This interview with Molly White goes into some of the problems of Web3, the new-ish decentralised internet industry to which a lot of crypto finance belongs.

Insights for successful enforcement of Europe’s Digital Markets Act: Christophe Carugati and Catarina Martins of the economics think tank Bruegel share some suggestions on how the DMA could be effectively enforced.

Fiscal support and monetary vigilance: Economic policy implications of the Russia-Ukraine war for the European Union: In this policy brief, the economic policy grandees Olivier Blanchard and Jean Pisani-Ferry lay out the possible consequences of the Russian invasion for the EU economy. For people who are too lazy to read the whole policy brief, here is a short summary in a chart.

Wild mammals make up only a few percent of the world’s mammals: This is just crazy to contemplate. If you weigh up the biomass of all mammals in the world, only 2% of it would be made up of wild animals, all the rest being the biomass of us, humans, and the livestock we eat. This article from “Our World in Data” brings this disconcerting truth home in a series of impressive graphs.

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