These data make it possible to distinguish between sectors of the economy that are fragmented, concentrated or oligopolistic, and to look at how revenues have fared in each case. Revenues in fragmented industries—those in which the biggest four firms together control less than a third of the market—dropped from 72% of the total in 1997 to 58% in 2012. Concentrated industries, in which the top four firms control between a third and two-thirds of the market, have seen their share of revenues rise from 24% to 33%. And just under a tenth of the activity takes place in industries in which the top four firms control two-thirds or more of sales. This oligopolistic corner of the economy includes niche concerns—dog food, batteries and coffins—but also telecoms, pharmacies and credit cards.
Concentration does not of itself indicate collusion. Other factors at play might include regulations that keep competitors out. Business spending on lobbying doubled over the period as incumbents sought to shape regulations in ways that suited them. The rising importance of intangible assets, particularly patents, has meant that an ability to manage industry regulators and the challenges of litigation is more valuable than ever.
The ability of big firms to influence and navigate an ever-expanding rule book may explain why the rate of small-company creation in America is close to its lowest mark since the 1970s (although an index of startups run by the Kauffman Foundation has shown flickers of life recently). Small firms normally lack both the working capital needed to deal with red tape and long court cases, and the lobbying power that would bend rules to their purposes. A lack of lobbying clout and legal savvy may also help explain foreign firms’ loss of momentum. In the 1990s adventurers from abroad piled into America, with the share of output from foreign-owned subsidiaries rising steadily. But foreign firms seem to have lost their mojo. Since 2003 their contribution has been flat at about 6% of private business output.
Another factor that may have made profits stickier is the growing clout of giant institutional shareholders such as BlackRock, State Street and Capital Group. Together they own 10-20% of most American companies, including ones that compete with each other. Claims that they rig things seem far-fetched, particularly since many of these funds are index trackers; their decisions as to what to buy and sell are made for them. But they may well set the tone, for example by demanding that chief executives remain disciplined about pricing and restraining investment in new capacity. The overall effect could mute competition.
Quantifying the effect of the corporate America’s defences is tricky. Profits are not the whole picture. In some industries—banking is a case in point—rent-seeking will result in high pay to an employee elite instead. But one can get a crude sense of what is going on by dividing the profits all firms generate into the “bog-standard” and the “exceptional”. Over the past 50 years return on capital has averaged about 10% (excluding goodwill) and that is what investors tend to demand, so let that represent bog-standard profits. The excess on top of that—which may reflect brilliant innovations, wise historic investments in intangible assets such as brands, or, perhaps, a lack of competition—is the exceptional bit. For S&P 500 firms these exceptional profits are currently running at about $300 billion a year, equivalent to a third of taxed operating profits, or 1.7% of GDP.
The article concludes:
But with their heads deep in data and court rulings that set fine precedents, the scientists of antitrust are able to sidestep some troubling questions. If markets are truly competitive, why do so many companies now claim they can retain the cost synergies that big deals create, not pass them on to consumers? Why do investors believe them? Why have returns on capital risen almost everywhere?
It would aim to unleash a burst of competition to shake up the comfortable incumbents of America Inc. It would involve a serious effort to remove the red tape and occupational-licensing schemes that strangle small businesses and deter new entrants. It would examine a loosening of the rules that give too much protection to some intellectual-property rights. It would involve more active, albeit cruder, antitrust actions. It would start a more serious conversation about whether it makes sense to have most of the country’s data in the hands of a few very large firms. It would revisit the entire issue of corporate lobbying, which has become a key mechanism by which incumbent firms protect themselves.
Large firms no longer employ all that many people in America: the domestic employee base of the S&P 500 is only around a tenth of total American employment. New firms would invest more, employ more staff, and force incumbents to invest more in order to compete.