The Decline of Competition?
By David Henderson
The title of this post is the title of my latest piece for Hoover’s Defining Ideas, published August 13.
Here’s one of the opening paragraphs:
Are these authors and commentators right? What is their evidence? More fundamentally, what do the words “monopoly,” “market power,” and “competition” mean, and what monopolies or forms of market power should we worry about? Also, when we do worry about monopoly or market power, what are the appropriate policies to deal with it? It turns out that economists over the last 200 years have carefully considered many of these issues. Unfortunately, some of their insights have been lost, and one main reason is that many of those who worry about monopoly have a static, rather than a dynamic, view of competition.
But there are two major problems with that measure [the percent of revenues of the top 50 firms in an industry.] I’ll illustrate the first one by highlighting an industry referenced in Obama’s CEA report. A table in the report shows that the top 50 firms in the second largest U.S. industry, retail trade, earned $1.56 trillion in revenue in 2012. Their share of revenue increased from 25.7 percent of industry revenues in 1997 to 36.9 percent, an increase of 11.2 percentage points.
Did any major change in retail trade happen between 1997 and 2012? Yes. It was called Amazon. Before Amazon became important, what typically mattered for you as a retail customer was the amount of competition in your local market. So, if you lived in San Francisco and wanted a lawn chair, you might go to Sears (remember them?), Home Depot, or your local hardware store. But after Amazon came into being, you had another major choice: saving a lot of time traveling from store to store and, instead, sitting at your desk or kitchen table, or even lounging on your old lawn chair, and ordering from home. Not only did you save time but also the odds are that you got a lower price. In short, Amazon made the relevant market for you much more competitive. And it did that even while, at times, wiping out local competitors.
Read the whole thing.