Superstar companies may not be evil, just good at what they do
The US Patent and Trademark Office shows a few companies have been applying for a larger share of patents, as well as buying up an increasing percentage of the patents that already exist
Big companies are taking over the US In industry after industry, from telecoms to retail to banking to healthcare, larger corporations are gobbling up market share from smaller ones — sometimes by merging with them, sometimes by taking their business.
Nor does the trend toward mega-corporations show any sign of abating. A proposed merger between media giants CBS and Viacom, and another between pharmaceutical companies Bristol-Myers Squibb and Celgene, are only the latest examples. Mergers and acquisitions activity has increased in the past few years:
This trend toward ever-larger corporate behemoths has led many economists, politicians and activists to question whether the US economy is being taken over by monopolies. Further evidence of such a takeover comes from signs that price mark- ups are increasing, and corporate profits have been rising as a share of the economy.
If competition really is dying, the US government needs to attack the problem somehow — blocking mergers, breaking up more companies, or enacting policies such as minimum wages and union-friendly laws that balance out corporate power. In some extreme cases, such as medical care, government health insurance might even be necessary to force down prices on consumers’ behalf.
If Gutiérrez and Philippon are right that top corporations are merely growing bigger instead of becoming more efficient, it blurs the distinction between the monopoly power story and the superstar story
But a few economists urge caution. Before making big changes to the system, they reason, policy makers and researchers alike should examine alternatives to this narrative. What if companies are getting bigger not because they’ve figured out how to eliminate rivals unfairly, but because they’re simply better at what they do?
A recent paper by Chad Syverson of the University of Chicago Booth School of Business argues that it’s still possible that the rise in mark-ups is an illusion — the result of mis-measurement by economists. Citing research by Nicolas Crouzet and Janet Eberly, he suggests an alternative explanation: that big companies such as Wal-Mart, Google or Pfizer are simply richer in intangible assets, such as highly effective management cultures, advanced technological know-how, beloved popular brands, and so on.
Economists David Autor, David Dorn, Lawrence Katz, Christina Patterson and John Van Reenen, who wrote one of the first papers to bring attention to the phenomenon of rising concentration, also endorse a story of so-called superstar companies. They point out that the companies that have been establishing dominance tend to use less labour to generate revenue, suggesting that they’re winning because they’re more productive.
A new paper by economists Ufuk Akcigit and Sina Ates makes a similar argument. They cite a wide array of evidence showing that the US economy has become less dynamic — fewer businesses are being started, fewer workers are moving between companies and older businesses are coming to dominate the market. Drawing on evidence from the US Patent and Trademark Office, they show that a few companies have been applying for a larger share of patents, as well as buying up an increasing percentage of the patents that already exist.
Research and development
A recent McKinsey analysis also shows that top companies are spending more on research and development. This evidence suggests hoarding of knowledge. It could also help explain the disturbing fact that a few companies appear to be pulling away from the rest in terms of productivity growth.
Some economists strenuously dispute the idea that top companies deserve the “superstar” label at all. In a recent paper, Germán Gutiérrez and Thomas Philippon argue that since about 2000, top US companies have largely stopped improving the productivity of their operations, and have instead begun simply absorbing capital, employees and other resources from rivals (their increased profitability, the authors claim, is due mainly to paying lower taxes).
If Gutiérrez and Philippon are right that top corporations are merely growing bigger instead of becoming more efficient, it blurs the distinction between the monopoly power story and the superstar story.
If some companies are hoarding all of the top employees, technological know-how and patents, it suggests that the US government should be focused on spreading those riches more widely. One way to do this is to ban employee non-compete agreements, which would help top workers (and the ideas contained in their heads) circulate among many different companies.
Another policy is patent reform — severely curtailing patenting in areas such as product design and software, and raising the hurdles for patenting in general.
All of this evidence suggests that policy to promote competition needs to open up an additional line of attack. Rolling back market concentration directly with anti-trust policy and reduced regulatory barriers to entry is good, as are institutions that support workers and consumers directly. But policy makers should also be thinking about how to diffuse knowledge and talent from top companies to lagging competitors and scrappy start-ups. The economy could use fewer superstars and more stars of all sizes.
• Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
• This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.