Antitrust Enforcement for the 21st Century

Published date01 December 2019
Date01 December 2019
Antitrust Enforcement
for the 21st Century
Marc Jarsulic*
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.
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.
The Antitrust Bulletin
2019, Vol. 64(4) 514-530
ªThe Author(s) 2019
Article reuse guidelines:
DOI: 10.1177/0003603X19877008
$600 billion for the year.
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
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.
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 at¼okzZ.
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.POLYREV. 235 (2017).
Jarsulic 515

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