GThe overment is At war with big corporations. In June, U.S. President Joe Biden spoke for many politicians around the world and blamed the United States for rising prices, slowing wage growth, abandoned innovation, and weak supply chains due to greed. did. His Trust Busters at the Federal Trade Commission (F.T.C.) have pursued large deals simply because of their size, or so they feel. Defeat in court has not dampened authorities' enthusiasm. The most recent case was on July 11, when a judge denied a request to block Microsoft's $69 billion acquisition of video game developer Activision Blizzard.of ftc He said he would appeal the ruling.of european unioncompetition authorities are threatening to break up Google. Last year, the UK Competition and Markets Authority (CMA) Semiconductor giant Nvidia's $40 billion acquisition of chip design company Arm has fallen through.
Trustbusters brings up three reasons to justify its renewed vigor. Increased market concentration, reduced turnover among the world's largest companies, and explosive growth in profits. On the surface, all three point to an increase in corporate power. However, upon closer inspection, this trend may be the result of benign factors such as technological advances and globalization. In certain regional markets, increased concentration may paradoxically lead to more competition rather than more competition. And the coronavirus pandemic may have sown the seeds for a further revival of competitiveness. It's true that some large companies collect rent, including in big sectors like health care. But Trustbusters' strategy of reflexively questioning every transaction involving large corporations is misguided.
There is no question that my ability to concentrate has increased. The U.S. economy as a whole is now higher than at any point in at least the past century (see Figure 1). Of the approximately 900 sectors in the United States, economistThe number of companies with two-thirds or more of market share held by the Big Four has increased from 65 in 1997 to 97 by 2017. In Europe, where data are less comprehensive, concentration has been increasing for at least two decades. Using data on Western Europe's largest economies – the UK, Germany, France, Italy and Spain, three economists, Gabor Koltai, Szabolcs Lorincz and Tommaso Valetti, found that about 700-odd industries found that the market share of the big four companies increased in 73% of cases. The average increase from 1998 to 2019 was approximately 7 percentage points. The percentage of industries where the top four companies had more than half of the market share increased from 16% to 27%. The UK and France rose the most.
At the same time, incumbents appear to be more firmly established. In the UK, the average number of companies remaining in the top 10 in their industry by market share three years later was five before the financial crisis. Now it's approaching 8. Thomas Philippon of New York University's Stern School of Business has found a similar decline in turnover among top U.S. companies.
Most importantly, companies are earning higher profits. economist produced a rough estimate of the “excess” profits of the world's 3,000 largest publicly traded companies (excluding financial companies) based on market capitalization. Calculate the return on invested capital for companies with a hurdle rate above 10% (excluding goodwill and R&D treatments) using numbers reported from Bloomberg. R&D, as an asset with a useful life of 10 years). This is the expected rate of return in a competitive market. Over the past year, excess profits reached $4 trillion, nearly 4% of the global total. GDP (See Figure 2). They are highly concentrated in the West, especially in America. US companies collected 41% of the total, and European companies accounted for 21%. The energy, technology, and, in the United States, healthcare industries stand out as excess profit pools relative to their size.
This all seems like a nuisance. And in certain fields, that's the reality. Forty years ago, more than 8 out of 10 hospitals were non-profit hospitals based in one location. More than six out of 10 are now owned by sprawling for-profit hospital chains or academic networks such as Steward Health Care and Indiana University Health. Initially, this was a perfectly healthy process for a large, efficient chain that expanded across America. Two decades and nearly 2,000 hospitals later, things look bleak. A 2019 analysis by Carnegie Mellon University's Martin Gaynor and colleagues suggests that many of these mergers tend to raise prices without improving quality.
Still, higher focus, lower churn, and richer profits don't necessarily make things worse for consumers. This concentration has increased over his 100 years, during which time virtually everyone's life has improved, the first clue that it may be the result of benign forces. . Yuelan Ma of the University of Chicago Booth School of Business and colleagues say that the increase in industrial concentration in the United States over the past century has been correlated with increased technology intensity, higher fixed costs, and higher output. None of these seem particularly malicious.
Concentrations are also rising in Europe, where competition authorities are less enthusiastic than in the United States, suggesting similarly powerful structural forces at work. John Van Reenen of the London School of Economics points out technology and globalization. The Internet has reduced the cost of shopping, even as software and other technologies have allowed blue-chip companies to expand their operations around the world. Figures compiled by consultancy McKinsey & Company show that companies in the 75th percentile of this measure have a 20 percent higher return on invested capital than companies in the median. “There are huge economies of scale in software,” said Sterling Auty of research firm MoffettNathanson.
Furthermore, increased concentration at the national level may increase competition within the region. The service industry, in particular, accounts for about half of the 900-odd sectors in the U.S. census, so it's better to look at it at the local level. Fiona Scott Morton, a former assistant attorney general and current graduate student at Yale School of Management, uses coffee shops as an example. If there is only one cafe in each region, the national market becomes highly fragmented. But every consumer faces a local monopoly. “If I want to get coffee, I'm not going to drive three hours,” she says.
Scholars debate what happened to the concentration in local markets. What is becoming increasingly clear is that the best companies are moving into more and more companies. Walmart meets the needs of shoppers across the country with “everyday low prices” thanks to the retail giant's unparalleled logistics operations. The Cheesecake Factory uses a laboratory in California to test the food and quickly rolls it out to his 200 or so locations across the United States. A recent paper, “The Industrial Revolution in Services,” by Esteban Rossi-Hansberg of the University of Chicago and his co-authors argues that the geographic expansion of large companies increases competition from local incumbents and reduces local market share. It shows that.
As for low churn, it's not too bad if incumbents keep innovating. That's what many companies do. US private investment was 17.2% in the first quarter of 2023, even as central banks raised interest rates at the fastest pace in decades to tame inflation. GDP, similar to pre-pandemic highs. Many large companies are pouring billions of dollars into innovation, including in areas of greatest concern to trust destroyers, such as technology. Five major American technology companies (Alphabet, Amazon, Apple, Meta, and Microsoft) have collectively invested about $200 billion. R&D Last year's population was equivalent to a quarter of America's total population in 2021. Microsoft and Alphabet are at the forefront of this space. A.I. Race.
Indeed, since the 2007-2009 financial crisis, U.S. profits have been higher than in previous decades, especially when accounting for free cash flow, which accounts for changes in how companies depreciate their assets (see Figure 3). reference). But once you adjust for low tax rates and the company's expanding global footprint, they don't seem all that unusual. And they may have reached their peak. The analyst is S&P The 500 index of U.S. blue-chip companies declined for the third straight quarter compared to a year earlier in the three months to June.
The most encouraging thing may be that, far from being suppressed, dynamism is increasing. John Haltiwanger of the University of Maryland notes that business formation, which had been “pretty anemic” since the mid-2010s, has surged since the pandemic (see Figure 4). Over the past few years, more new companies have been founded than old ones closed. It remains unclear whether these new companies will displace incumbents. But investing in venture capital suggests investors think there's room for healthy returns. That's only half of its frothy peak of more than $130 billion in the fourth quarter of 2021, but it's only returned to 2019 and 2020 levels.
One hypothesis is that the post-COVID-19 economy will be more remote-friendly, reducing startup costs. Young companies no longer need to rent large offices. They can hire from a small local talent pool. By our rough count, about 125 of the Census Bureau's nearly 900 industries are benefiting from e-commerce growth or can be served remotely. Increasing consumer confidence in these options could encourage more new businesses to set up shop. Haltiwanger has already observed a slight shift in the size distribution of companies towards smaller companies.
Concentrations may also be leveling off as a result of subdued trading, especially in high-tech sectors. The Big Five tech companies' share of all acquisitions by publicly traded U.S. companies has fallen from nearly 1% in the 2010s to less than 0.5% since the start of Biden's term. Some slowdown in mergers and acquisitions (M&a) is caused by the rising cost of capital and the risk of recession. New antitrust fervor is also probably playing a role. On June 27, U.S. regulators updated their merger guidelines for the first time in 45 years, requiring companies to provide more detailed reporting on deals over $110 million, half the average deal size in 2022.
Large deals will almost certainly be subject to closer scrutiny, and the application process, which currently takes weeks, could take months more. Regulators everywhere are “throwing sand into the regulatory gears” M&a “It's a machine,” the lawyer said with a sigh. ” F.T.C. I have lost my discernment,” says another.british CMA”“We're probably going too far,” echoes the British opinion (see box).
However, zealous distrust comes with its own risks. It could distract from the more immediate threat to economic dynamism from bureaucratic restrictions on land use and occupational permits. Acquisitions can help preserve startup value when market downturns make it difficult for founders to raise capital. And some big deals can benefit consumers, such as when a biotech startup partners with an established pharmaceutical company to test and distribute new treatments. Competition authorities have probably been asleep for a long time. Now they may be waking up too early. ■
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