To Build a Competitive Economy for Everyone, America Must Look Beyond Tech Regulation

Market Concentration Concerns Dominate Many Other Industries Beyond the Tech Sector

Vinod Bakthavachalam
Vinod B
Published in
9 min readJul 12, 2021


After years of lax regulations, governments around the world are flexing their antitrust muscles to corral big tech firms. This has heated up in the US where the Justice Department and FTC have brought cases against Google, Facebook, and others. Indeed, anti-tech legislation is one of the few things both Democrats and Republicans can agree upon.

The main concern is that large tech firms are using their dominant position to reduce competition, securing market power and profits in one area, and then using that dominance to bully their way into adjacent markets and reduce competition further (think of Google using its dominant position in web search to also dominate online advertising).

However, a wealth of recent economic literature has shown that competition is declining across most industries in the US, not just in Tech. In many cases the fact that other industries are becoming concentrated is more worrying.

This increased market concentration is at least partly responsible for many of the worrying trends in the US economy like low labor force participation, low productivity growth, low wages for certain workers, and rising inequality. In particular, increasing market concentration is often an under discussed cause of inequality.

Politicians need to look beyond the cause of the day in Tech regulation to build a comprehensive set of antitrust regulations that apply to all industries. Otherwise inequality is going to continue to increase, and the American dream will likely continue to decline.

The Economic Theory of Industry Concentration

The standard way to think about concentrated markets is monopolistic competition. Here there are multiple firms (in contrast to the standard, single monopoly case) competing against each other, but they each sell differentiated products which are not perfect substitutes. The differentiation can exist on multiple dimensions such as branding, marketing, effectiveness, and other characteristics.

As an example, think of the toothpaste aisle where each product has a different color, cost, packaging, and discussions of its effectiveness. There is toothpaste for sensitive teeth, whiter teeth, with all natural ingredients, with fluoride, and many other types.

Firms in an industry with monopolistic competition have pricing power because of this product differentiation as consumers don’t readily substitute to other products. Like when there is a single monopoly, firms can affect the market price through choosing what quantity to produce.

The firm tries to maximize profit by choosing the optimal quantity Q to produce:

max wrt Q: Profit(Q) = P(Q)*Q-F-C(Q)

where P(Q) is the demand curve for the firm’s product (a higher quantity Q implies a lower price P(Q)), Q is the quantity produced by the firm, F is fixed costs of production (which don’t vary with quantity produced), and C(Q) is the marginal cost which does vary with Q (C(Q) increases as the quantity produced Q increases).

Therefore the optimality condition is to choose Q such that:


where P(Q)=p is price, dP/dQ is the slope of the demand curve so dP/dQ<0, and dC/dQ=MC or marginal cost which is always positive so MC>0.

We can rearrange this to:

p=MC-dP/dQ*Q≥MC since again dP/dQ<0 and Q≥0.

Unlike perfect competition where firms have no pricing power and p=MC, in monopolistic competition we have p>MC.

The ratio of p/MC is therefore greater than one and this is called the firm’s markup. Tracking markups over time are an indicator we can use to measure firm market power and whether market concentration is increasing or not. Higher markups over time imply the market is becoming less competitive and individual firms have more power in determining price and quantity among other things.

Here is the above in graphical form (from wikipedia) where we again see that price (Ps) is greater than marginal cost (MC) in equilibrium (Qs) under monopolistic competition:

The way firms support this markup is to reduce Q or the quantity they produce.

Because Q is lower we have a market inefficiency and dead weight loss where consumers get less output and face higher prices. There are transactions that would have taken place under perfect competition that do not occur here.

As Q is lower, there is less production in the economy, meaning there is less demand for inputs into production such as labor (L) and capital (K).

Monopolistic competition leads to higher unemployment (less L), lower investment (less K), and lower wages. The lower wages follow from the fact that as firms have market power when selling products, they also have market power over labor markets and hiring in the short run because of a lack of competitors.

Increasing monopolistic competition is potentially an explanation for many of the negative trends we see in the US over the last few decades in terms of lower labor force participation, lower wages for certain workers, lower investment, higher profits from economic rents (i.e. not due to anything valuable such as new innovation), and increasing inequality.

Measuring Firm Markups

De Loecker, Eekhout, and Unger use firm level data from financial statements to estimate average markups since the 1950s.

The authors derive a formula for firm markups by assuming firms look to minimize their costs, setting markups equal to the product of two factors: (1) the elasticity of output with respect to variable costs i.e. how a change in variable costs like the number of employees leads to a change in sales, and (2) the ratio of firms profits’ to variable costs.

Elasticity can be estimated using the relationship between a firm’s output and variable inputs like number of employees over time while the ratio of profits to variable costs is easily found in company financial statements as the ratio of revenue from sales to COGS (cost of goods sold).

Average markups across firms (weighted by market share) have risen by over 60% since the 1980s, meaning that firms are able to charge prices around 60% higher than their associated costs compared to the past.

This markup increase has occurred mostly for the top firms by market share (P90 or top 10%). There has been a rise of superstar firms in each industry that have increasing market share and market power to charge higher prices.

Strictly speaking, markups can rise due to a slew of positive, competitive forces in theory, so the rise in markups is not necessarily a bad thing.

For example, if investment costs or fixed costs required to setup a company increase, then firms would charge higher markups (price over marginal cost) to recoup their initial investment. However, markups have risen beyond what we would expect from the rise in overhead and capital costs. Furthermore, firm profitability has risen over time and firms with higher markups have seen larger gains in profitability than firms with smaller markups, suggesting that companies are benefiting from market power in the form of economic rents.

Markups might also increase due to better technology/innovation. This would be a welcome thing because firms that innovate gain an advantage in the market and reap the reward of that, incentivizing further innovation. However, technological progress does not explain the level of increase in markups in the US either.

Other positive reasons why markups might increase include the entry of more efficient firms into a market as older, inefficient ones go out of business and reallocation between industries towards more productive ones. Both of these are consistent with more creative destruction that leads to higher growth over time and rising living standards.

Yet neither net entry (new firms less those going out of business) or reallocation across industries from less productive to more productive ones explains the rise in markups. About two thirds of the rise in markups can be explained by reallocation within an industry where firms with high markups are gaining increasing market share, which is consistent with less competitive markets.

The rise in markups is also prevalent in all firms, including private ones, and not just public ones with available financial statements. Census data shows increases in industry markups in all retail and manufacturing firms.

The rise in markups over time is found in many individual industries as well, confirming that this becoming an increasingly worrying problem throughout the economy.

In short, the authors establish a robust, compelling case that markups have risen over time due to less competition within a host of industries in the US that has allowed firms to increase their profitability at the expense of consumers.

Assessing the Follow On Effects of Market Concentration

While the fact that less competitive markets and higher prices harm consumers should alone be enough to drive antitrust enforcement and concern among politicians, research has documented the wide ranging, negative effects of decreased market competition.

De Loecker, Eekhout, and Unger show that their measure of firm markups is associated with lower levels of the labor share of income, lower wages, and lower capital investment. All these lead to lower economic growth, lower living standards, and higher inequality.

Autor, et al. show that the rise of superstar firms with increasing markups and concentration of sales is consistent with the fall in the labor share of income. They demonstrate that a portion of this is due to technological change, which is good as firms innovating gain, but conclude that it could also be consistent with increasingly anticompetitive behavior by dominant firms as well.

Data on mergers in the US have shown increases over time in both frequency and value. Research from Blonigen and Pierce suggests that mergers, especially in the manufacturing industry, lead to increased markups and higher industry concentration but not generally to increased efficiency (which would be the argument for more mergers). This suggests that most mergers on net lead to increased concentration with none of the potential benefits of efficiency and should be blocked by regulators.

Benmelech, et al. show that local labor market concentration has increased over time, consistent with increasing market concentration overall, and that this increase in market concentration is consistent with lower wages.

Azar, et. all show that hiring for many occupations in the US is highly concentrated among a few firms and that this concentration leads to lower wages.

Gutiérrez and Philippon show that there is a causal relationship between increased concentration and lower levels of investment in the US. They also document a strong relationship between increased regulation, increased concentration, and lower investment. The increased regulation is consistent with existing firms in an industry lobbying for barriers to entry through things like occupational licensing that increase their market power.

To summarize, a wealth of literature has connected declining market competition and increased concentration based on higher markups to a host of negative economic consequences.

The US Needs to Strengthen All Antitrust Policies Instead of One off Policies Targeting Just Tech

It is clear that antitrust regulation in the US has failed since at least the 1980s. Concentration is on the rise as a few firms in each industry are increasingly operating in a winner take all framework, deriving higher profits from higher prices.

These higher markups and reduced competition are leading to a host of negative follow on effects, including lower wages, increasing inequality, and lower innovation. The future consequences of these will be dire unless politicians can look beyond the obvious Tech issue to the wider concentration problems hindering the American economy.

It is time to increase the level of antitrust scrutiny on mergers in every industry, reduce barriers to entry in the form of things like removing occupational licenses and rules around business formation, and reforming corporate taxes to better match the level of profits by closing loopholes, among many other things.

Unless the US gets serious about battling market concentration beyond just the big Tech firms, the negative trends of the last few decades will likely continue.


The Rise of Market Power and the Macroeconomic Implications

The United States Has a Market Concentration Problem

The State of Competition and Dynamism: Facts about Concentration, Start-Ups, and Related Policies

The Fall of the Labor Share and the Rise of Superstar Firms

Evidence for the Effects of Mergers on Market Power and Efficiency

Challenges to Mismeasurement Explanations for the U.S. Productivity Slowdown

Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?

Labor Market Concentration

Declining Competition and Investment in the U.S.



Vinod Bakthavachalam
Vinod B

I am interested in politics, economics, & policy. I work as a data scientist and am passionate about using technology to solve structural economic problems.