Washington, D.C. — A recent analysis from the Center for American Progress examines new quantitative evidence showing that a significant number of firms are protected by barriers to entry and earn monopolistic profits. The report calls for a range of policy changes that can reduce these barriers to entry and support increased competition among firms. Among CAP’s recommendations is a monopoly tax when other competition policies cannot remove barriers to entry for new firms.
“There is now striking evidence that a significant number of U.S. corporations are protected by barriers to entry and are earning monopoly-like profits,” said Marc Jarsulic, senior vice president for Economic Policy at CAP and co-author of the report. “This is a major problem for an economy that depends on competition to determine outcomes. It shifts the distribution of income in favor of corporate owners, reduces the incentive to innovate, and increases the ability of corporations to influence regulatory and political decisions. We need strong competition policies to address these challenges directly and forcefully.”
“The discussion around the lack of competition and its remedies cannot be limited to only a few sectors. This is an economywide issue, and the failure to implement corrective actions will allow the trends of upward redistribution to capital owners and squeezed wages for workers to continue,” said Andrew Schwartz, senior policy analyst for Economic Policy at CAP and co-author of the report.
The report presents new data to show that the competitive environment in the U.S. economy has changed dramatically since the late 1970s, with a significant share of corporations earning returns that exceed competitive levels. Various other data from across the economy—including firm markups, the 90-50 ratio for corporate returns, and the concentration of corporate profits in a declining number of firms—also point to reduced competition.
CAP’s report also identifies important sources of barriers to entry for new firms, including:
- Lax antitrust enforcement leading to market concentration. Recent empirical work shows that merger enforcement decisions allowing increased market concentration have often led to price increases.
- Strategic behavior to support entry barriers. Firms can use the regulatory and political system to protect their rents. As firms grow, they work to protect their advantages; this leads to further political investment and, in turn, more political power. The benefits of this political influence can include a sustained ability to extract rents. For instance, the U.S. telecommunications sector recently won several regulatory victories that are likely to aid in rent extraction.
- Intellectual property rules that frustrate entry. Intellectual property protection—a source of state-sanctioned monopoly power—is playing an increasingly important role in the U.S. economy. Because of changes to the patent system since the 1980s, patents have become easier to obtain and enforce, and the rewards for enforcement claims have increased.
- Increased importance of network effects, especially in digital businesses. Some goods produce network externalities, which exist when the benefits that an individual derives from a good increase when others decide to use it, creating additional incentive for others to buy the good. However, network effects can create barriers to entry. When an existing good succeeds in generating very high levels of externalities and that good is incompatible with competing goods, individual users will be reluctant to switch to the competitor, even when it is superior. This creates a so-called lock-in effect.
- Differential access to big data. Data are frequently locked up in closed systems or limited through intellectual property protections. Data access leads to material product improvements, including personalization and algorithm optimization, which in turn result in efficiencies, increased productivity, and better customer targeting. Such outcomes often benefit consumers, but these dynamics can also make it harder for new entrants to compete. Data may also make it easier for dominant firms to enter adjacent markets.
CAP’s report outlines policy recommendations central to addressing these barriers to entry and increasing competition. These policies include:
- Antitrust policy that prohibits mergers by firms already protected by entry barriers. Antitrust agencies should challenge acquisitions by dominant firms that are already protected by significant entry barriers. Such a ban appears to be an effective way to prevent strategic anti-competitive behavior.
- Changes to patent protections, including required licensing of patents with a public component. In important sectors of the economy such as pharmaceuticals and information technology, patent protection appears to contribute to high levels of rent extraction. The federal government could take several steps to reduce rents while also preserving incentives to innovate. In sectors with persistently high monopolistic profits due to patent protections, remedies could include required patent licensing.
- Open data standards and data portability to allow users to switch between digital platforms. This will require that users are able to communicate across social media platforms. Where appropriate, agencies should draft sector-specific data-sharing provisions to mandate that firms open application programming interfaces and enable access to useful data feeds. Requiring interoperability of user content—or enabling users to communicate across platforms—would make it far easier for new platforms to enter the market.
- Institute a monopoly tax when competition policy cannot remove entry barriers. To complement entry-related policies, CAP’s report proposes implementing a higher tax on the profits of firms that have accrued high rents over an extended period. This tax would not break up firms but would reduce the flow of economic rents. Such a policy would make these revenues available for public purposes with no harm to efficiency; discourage further efforts to enhance market power through actions such as mergers and acquisitions; and diminish the ability of dominant firms to use their outsize returns to influence political and regulatory outcomes.
Click here to read “Toward a Robust Competition Policy” by Marc Jarsulic, Ethan Gurwitz, and Andrew Schwartz.
Click here to read the accompanying fact sheet.
For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202-478-6331.