Category Archives: monopoly

16/7/18: Wither Free Market America

Prior to the 1990's, “U.S. markets were more competitive than European markets”, with the U.S. having a lead-start on the EU of some decades, if not centuries, when it comes to the anti-trust laws and anti-true enforcement. In fact, as noted by Germán Gutiérrez and Thomas Philippon in their new paper “HOW EU MARKETS BECAME MORE COMPETITIVE THAN US MARKETS: A STUDY OF INSTITUTIONAL DRIFT” (NBER Working Paper 24700 June 2018), it was Europe that largely copied the U.S.  legal and regulatory frameworks for dealing with excessive concentration of the market power. Thus, given the “initial conditions, one would have predicted that U.S. markets would remain more competitive than European (EU) markets.” Except they did not. As Gutiérrez and Philippon show, the U.S. “experienced a continuous rise in concentration and profit margins starting in the late 1990s. And, perhaps more surprisingly, EU markets did not experience these trends so that, today, they appear more competitive than their American counter-parts.”

“Figure 1 illustrates these facts by showing that profit rates and concentration measures have increased in the US yet remained stable in Europe. In addition, note that the U.S the increased integration among EU economies essentially shifts the appropriate measure of concentration from the red dotted line towards the blue line with triangles – which further strengthens the trend."

Figure 1: Profit Rates and Concentration Ratios: US vs. EU

Source:  Gutiérrez and Philippon (2018)

So, in summary, today, “European markets have lower concentration, lower excess profits, and lower regulatory barriers to entry.” even looking at specific industries “with significant increases in concentration in the U.S., such as Telecom and Airlines, and show that these same industries have not experienced similar evolutions in Europe, even though they use the same technology and are exposed to the same foreign competition” (see chart below).

Source:  Gutiérrez and Philippon (2018)

Of course, the point of reduced degree of competition in the U.S. markets is hardly new. I wrote about this on numerous occasions, including covering evidence on the U.S. markets monopolization, oligopolization and markets concentration risks (see links here: and I wrote about these phenomena in the context of the growing trend toward de-democratization of the U.S. politics (see:  Hence, the main issue with this evidence is: “what explains the U.S. trend in contrast to the EU?”

Gutiérrez and Philippon (2018) argue that politicians care about consumer welfare but also enjoy retaining control over industrial policy. We show that politicians from different countries who set up a common regulator will make it more independent and more pro-competition than the national ones it replaces.” In other words, once politicians surrender control to a multinational institution (e.g. the EU or ‘Brussels’ or, in the case of Switzerland, to the umbrella-type Federal Government), they tend to favour such new institutional arrangement to be more independent from national politics.

Hence, as Gutiérrez and Philippon (2018) more, “European institutions are more independent than their American counterparts, and they enforce pro-competition policies more strongly than any individual country ever did. Countries with ex-ante weak institutions benefit more from the delegation of antitrust enforcement to the EU level. “ These dynamics are reflected in the switch from the ’average of the nation states’ red dotted line in the chart above, toward a unified EU-wide measure reflected by the blue line.

This theoretical view produces three treatable hypotheses: if Gutiérrez and Philippon (2018) are correct, then:
1. EU countries agree to set up an anti-trust regulator that is tougher and more independent than their old national regulators (and the US)
2. US firms spend more on lobbying US politicians and regulators than EU firms.
3. Countries with weaker ex-ante institutions benefit more from supra-national regulation.

For Hypothesis 1, the authors look at merger and non-merger reviews and remedies that form “an EU-level competency”. Gutiérrez and Philippon (2018) “show that DG Comp is more independent and more pro-competition than any of the national regulators, including the U.S.” Furthermore, “enforcement has remained stable (or even tightened) in Europe while it has become laxer in the U.S.” More ominously (for the consumption-based economy like the U.S.), product market regulations, usually a shared competency between the member state and the EU, the authors “find that the EU has become relatively more pro-competition than the U.S. over the past 15 years. Product market regulations have decreased in Europe, while they have remained stable or increased in the U.S.”

For Hypothesis 2: Gutiérrez and Philippon (2018) look at political expenditures, and show that “U.S. firms spend substantially more on lobbying and campaign contributions, and are far more likely to succeed than European firms/lobbyists.”

For Hypothesis 3: Gutiérrez and Philippon (2018) show that “EU countries with initially weak institutions have experienced large improvements in antitrust and product market regulation. Moreover, we find that the relative improvement is larger for EU countries than for non-EU countries with similar initial institutions.”

There is, of course, a remaining issue left unaddressed by the three hypotheses above: does more enforcement by more independent regulators inhibit innovation and competition? In other words, is European advantage over the U.S. a de facto Trojan Horse by which inhibiting regulation enters the markets? Gutiérrez and Philippon (2018) “find no evidence of excessive enforcement in Europe: enforcement leads to lower concentration and profits but we find no evidence of a negative impact on innovation. If anything, (relative) enforcement is associated with faster future (relative) productivity growth, although the effects are small.”

So, put simply, part of the increasing market concentration and power in the U.S. can be explained by the tangible politicization of the American regulatory environment. Of course, as noted in my own posts on the subject (see link above), this political channel for monopolization reinforces industry structure channel (ICT ‘disruption’ channel) and other channels that support increased market power for dominant firms. All of this, taken together, means one thing: the U.S. is falling dangerously behind in terms of the degree of its economy openness to challengers to the dominant firms, resulting in barriers to entrepreneurs, innovators and smaller enterprises. The costs of this ‘Google Syndrome’ are mounting, ranging from depressed wages, to jobs insecurity, to lack of investment and productivity growth, to growing voters unease with the status quo.

The premise of the Free Markets America no longer holds. Worse, Social(list) Europe is now beating the U.S. in its own game.

6/6/2018: Monopsony Power in US labour market

I have recently written about rising firm power in labour markets, driven by monopsonisation of the markets thanks to the continued development of the contingent workforce: In this, I reference a new paper "Concentration in US labour markets: Evidence from online vacancy data" by  Azar, J A, I Marinescu, M I Steinbaum and B Taska. The authors have just published a VOX blog post on their research, worth reading:

23/5/18: Contingent Workforce, Online Labour Markets and Monopsony Power

The promise of the contingent workforce and technological enablement of ‘shared economy’ is that today’s contingent workers and workers using own capital to supply services are free agents, at liberty to demand their own pay, work time, working conditions and employment terms in an open marketplace that creates no asymmetries between their employers and themselves. In economics terms, thus, the future of technologically-enabled contingent workforce is that of reduced monopsonisation.

Reminding the reader: monopsony, as defined in labour economics, is the market power of the employer over the employees. In the past, monopsonies primarily were associated with 'company towns' - highly concentrated labour markets dominated by a single employer. This notion seems to have gone away as transportation links between towns improved. In this context, increasing technological platforms penetration into the contingent / shared economies (e.g. creation of shared platforms like Uber and Lyft) should contribute to a reduction in monopsony power and the increase in the employee power.

Two recent papers: Azar, J A, I Marinescu, M I Steinbaum and B Taska (2018), “Concentration in US labor markets: Evidence from online vacancy data”, NBER Working paper w24395, and Dube, A, J Jacobs, S Naidu and S Suri (2018), “Monopsony in online labor markets”, NBER, Working paper 24416, dispute this proposition by finding empirical evidence to support the thesis that monopsony powers are actually increasing thanks to the technologically enabled contingent employment platforms.

Online labour markets are a natural testing ground for the proposition that technological transformation is capable of reducing monopsony power of employers, because they, in theory, offer a nearly-frictionless information and jobs flows between contractors and contractees, transparent information about pay and employment terms, and low cost of switching from one job to another.

The latter study mentioned above attempts to "rigorously estimate the degree of requester market power in a widely used online labour market – Amazon Mechanical Turk, or MTurk... the most popular online micro-task platform, allowing requesters (employers) to post jobs which workers can complete for."

The authors "provide evidence on labour market power by measuring how sensitive workers’ willingness to work is to the reward offered", by using the labour supply elasticity facing a firm (a standard measure of wage-setting (monopsony) power). "For example, if lowering wages by 10% leads to a 1% reduction in the workforce, this represents an elasticity of 0.1." To make their findings more robust, the authors use two methodologies for estimating labour supply elasticities:
1) Observational approach, which involves "data from a near-universe of tasks scraped from MTurk" to establish "how the offered reward affected the time it took to fill a particular task", and
2) Randomised experiments approach, uses "experimental variation, and analyse data from five previous experiments that randomised the wages of MTurk subjects. This randomised reward-setting provides ‘gold-standard’ evidence on market power, as we can see how MTurk workers responded to different wages."

The authors "empirically estimate both a ‘recruitment’ elasticity (comparable to what is recovered from the observational data) where workers see a reward and associated task as part of their normal browsing for jobs, and a ‘retention’ elasticity where workers, having already accepted a task, are given an opportunity to perform additional work for a randomised bonus payment."

The findings from both approaches are strikingly similar. Both "provide a remarkably consistent estimate of the labour supply elasticity facing MTurk requesters. As shown in Figure 2, the precision-weighted average experimental requester’s labour supply elasticity is 0.13 – this means that if a requester paid a 10% lower reward, they’d only lose around 1% of workers willing to perform the task. This suggests a very high degree of market power. The experimental estimates are quite close to those produced using the machine-learning based approach using observational data, which also suggest around 1% reduction in the willing workforce from a 10% lower wage."

To put these findings into perspective, "if requesters are fully exploiting their market power, our evidence implies that they are paying workers less than 20% of the value added. This suggests that much of the surplus created by this online labour market platform is captured by employers... [the authors] find a highly robust and surprisingly high degree of market power even in this large and diverse spot labour market."

In evolutionary terms, "MTurk workers and their advocates have long noted the asymmetry in market structure among themselves. Both efficiency and equality concerns have led to the rise of competing, ‘worker-friendly’ platforms..., and mechanisms for sharing information about good and bad requesters... Scientific funders such as Russell Sage have instituted minimum wages for crowd-sourced work. Our results suggest that these sentiments and policies may have an economic justification. ...Moreover, the hope that information technology will necessarily reduce search frictions and monopsony power in the labour market may be misplaced."

My take: the evidence on monopsony power in web-based contingent workforce platforms dovetails naturally into the evidence of monopolisation of the modern economies. Technological progress, that held the promise of freeing human capital from strict contractual limits on its returns, while delivering greater scope for technology-aided entrepreneurship and innovation, as well as the promise of the contingent workforce environment empowering greater returns to skills and labour are proving to be the exact opposites of what is being delivered by the new technologies which appear to be aiding greater transfer of power to technological, financial and even physical capital.

The 'free to work' nirvana ain't coming folks.