$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
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).