Antitrust Enforcement for the 21st Century

• Author: Marc Jarsulic
• Published date: 01 December 2019
• DOI: 10.1177/0003603X19877008
• Date: 01 December 2019

Article

Antitrust Enforcement

for the 21st Century

Marc Jarsulic*

Abstract

Market competition is faltering in important parts of the U.S. economy. Measures commonly used by

economists to evaluate firm-level economic performance now indicate that many firms have market

power and are earning profits above competitive levels. The expected response—the entry of new

firms that want to earn a share of those higher returns in those markets—has not happened. This is a

consequence of barriers to entry, arising from a variety of sources including increased market con-

centration, the increased use of intellectual property protection in the form of patents, the rise of

business models dependent on network externalities, and the rising importance of digital data as an

input in production. The principal conclusion of this article is that antitrust policy must be reoriented

to effectively limit the creation of barriers to entry. An example of how merger policy could be

changed is developed.

Keywords

antitrust law, New Brandeis School, barriers to entry, market power

I. Introduction

By objective empirical standards, the U.S. economy has seen a remarkable expansion of corporate

market power over the past four decades. The share of corporations earning profits above competitive

levels has risen since the late 1970s. Large firms in many sector s—especially in communication

services, health care, and information technology (IT)—now have market power that allows them

to maintain prices above competitive levels. In this article, we argue that this is a result of reduced

competition in relevant markets.

This has important implications for the U.S. economy, which is largely governed through

market competition. When firms are earning supranormal profits—returns to capital beyond what

a competitive market would deliver—income is redistributed upward to owners. The excess of

profits above competitive levels, which following economic terminology we shall refer to as

rents, is substantial. In 2015, for example, economic rent accounted for half the earnings of

nonfinancial corporations—which means that aggregate corporate rent was somewhat more than

*Center for American Progress, Washington, DC, USA

Corresponding Author:

Marc Jarsulic, Center for American Progress, 1333 H Street N.W., Washington, DC 20005, USA.

Email: mjarsulic@americanprogress.org

The Antitrust Bulletin

2019, Vol. 64(4) 514-530

ªThe Author(s) 2019

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DOI: 10.1177/0003603X19877008

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$600 billion for the year.

1

The economic rents that flow to these owners function like a tax on

everyone else, lowering real wages and shifting overall income shares away from workers. If

antitrust enforcement were effective, relevant markets would be far more competitive.

Moreover, because firms earn rent when entry by competitors is inhibited, the economy becomes

less dynamically efficient. When there are no entry barriers, high rates of profit attract new firms,

increasing supply and eventually reducing price. When barriers exist, investment capital does not flow

to its most profitable use and potential gains in productivity can be squandered.

Evidence suggests that several factors, apart from the developmen t of nonreplicable technical

superiority, are creating entry barriers. These include the development of businesses where network

externalities are significant; differential access to big sets of data on consumers; the increased impor-

tance of intellectual property rights; and the ability of firms to use mergers and acquisitions to increase

market power and sustain barriers to entry, in large measure because of ineffective antitrust

enforcement.

The evidence we develop supports the argument, advanced by the New Brandeis Scho ol, that

existing antitrust authority needs to be redirected to effectively deal with high levels of market power.

2

The metrics developed in this article, which provide a way to identify where barriers to entry are

restricting competition, can contribute to that project. We suggest a change to merger policy as an

example of how they might be used.

II. Evidence of Significant Barriers to Entry and Rising Corporate Rents

There is now significant evidence 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.

Under competitive conditions—in which capital owners with funds to invest maximize their profits,

and there are no barriers that prevent these funds from flowing to the projects with the highest rates of

return—it is expected that rates of profit on invested capital will converge across firms and industries

to a common, equilibrium value. The logic behind this expectation is simple: Supranormal rates of

return in any line of business create the incentive for their own elimination, since profit-maximizing

investors will have extra incentive to enter that business, replicate the productive process used by

incumbent firms, and earn some of the higher profits for themselves. Entry should continue until the

effects of increasing supply reduce prices and eliminate rents—that is to say, the difference between

competitive and supranormal profits.

However, there is now evidence that in the aggregate, the share of rents in corporate income is

positive and has trended upward since the late 1970s. To visualize this, consider the ratio of the equity

market value of corporations to the replacement cost of the physical and intangible capital stock that

they employ. This ratio, called Tobin’s Q, should be equal to 1 under competitive market conditions.

(See Appendix for an explanation of this metric.) However, Qvalues for many nonfinancial corpo-

rations have been trending upward since the late 1970s and are now significantly greater than 1. Using

firm-level data from a large sample of publicly traded U.S. corporations for the period 1975–2015—

excluding regulated utilities, financial firms, public service firms, and some others—economists Ryan

H. Peters and Lucian A. Taylor construct measures of firm-level Qvalues. These measures include the

1. In 2015, nominal profits of the nonfinancial corporate sector amounted to somewhat more than $1.25 trillion. Since the

average Qvalue for 2015 is two, the implication is that half of this value is economic rent. Data on nonfinancial corporate

profits from the Federal Reserve Bank of St. Louis FRED database at https://fred.stlouisfed.org/graph/?g¼okzZ.

2. The New Brandeis approach is described in Lina Khan, The New Brandeis Movement: America’s Antimonopoly Debate,9J.

EUR.COMP.L.PRAC. 31 (2018); Lina Khan & Sandeep Vaheesan, Market Power and Inequality: The Antitrust

Counterrevolution and Its Discontents,11HARV.L.POL’YREV. 235 (2017).

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