WASHINGTON—The rising power of a few corporate giants could weaken investment, deter innovation, and reduce the share of income paid to workers in advanced economies, according to a new report by the International Monetary Fund (IMF).
While the overall macroeconomic effects of the rising “monopoly problem” have been modest so far, further increases in the market power of big companies could become increasingly negative if they were left unchecked.
The problem could take a bigger toll on economic growth and people’s incomes in the future, warned the IMF, which urged policymakers to keep the market competition strong.
Speaking at the U.S. Chamber of Commerce, IMF Managing Director Christine Lagarde talked about the increasing concentration of market power in advanced economies. She said a small number of highly successful companies accounted for the “highest price markups.”
According to the IMF, the price markup—how much a company charges for its products compared with how much it costs to produce—is a good measurement of market power. When a company’s market power increases, it can maximize its profits by charging a higher price and reducing its output.
“In other words, there is a “winner-takes-most” dynamic at play—especially pronounced in the digital economy,” Lagarde said.
“I am not saying that we currently have a ‘monopoly problem.’ But I am saying that we should take appropriate measures—so that it does not become a problem.”
Increase in market power would lead a company to reduce its demand for capital and, therefore, its investment, according to the IMF study. It also stifles innovation, as the firm would have less incentive to innovate to stay competitive.
The study also found that increased market power since 2000 has accounted for at least 10 percent of the drop in the share of labor income in advanced economies.
Lagarde urged policymakers in countries such as the United States to take necessary measures to prevent the escalation of the problem in the future.
“That means reducing barriers to entry for new firms and reforming competition frameworks to ensure a level playing field in all sectors, whether traditional or high-tech,” she said.
A Problem in Advanced Economies
IMF studied the monopoly problem using data for nearly 1 million companies from 27 countries—both advanced and emerging markets—since the beginning of the 2000s.
According to the report, the price markup increases are more concentrated in advanced economies than in emerging markets. This increase in markups has taken place in most industries, with the largest among technology firms. And higher markups have been concentrated among a small number of companies.
Companies with the highest markups raised their average markup by more than 30 percent since 2000. These companies are more profitable and productive than their competitors. They also have more intangible assets like patents and software than others.
“In many markets, the rising market power of the more productive and innovative companies has been helped by their superior ability to exploit proprietary intangible assets, network effects, and economies of scale (reduced costs per unit as output increases),” the report stated.
“In the United States, for example, these high-markup companies have also expanded in size in relation to their low-markup counterparts, contributing to a larger increase in aggregate markups compared with Europe.”
The high markup companies may attempt to entrench their positions by building barriers to entry, such as high customer switching costs, therefore it is important for policymakers to ensure a level playing field among all companies, stated the report.
President Donald Trump has been vocal in his criticism of tech giants, particularly Amazon. In an interview in November 2018, he said his administration was looking into antitrust violations by Amazon, Google, and Facebook.
He has also repeatedly accused Amazon of scamming the U.S. Postal Service. And he has been critical of Amazon CEO Jeff Bezos, who owns The Washington Post.
IMF Predicts No Recession
The 2019 IMF and World Bank Spring Meetings will be held in Washington on April 12 through 14.
In its January report, the IMF projected that the global economy would grow at 3.5 percent in 2019 and 3.6 in 2020.
Lagarde said that the global economy is at “a delicate moment.”
The IMF cut its global growth forecast twice since last October due to slowing Chinese economic growth, the U.S.–China trade war, and financial worries in emerging markets.
“But, to be clear, we do not see a recession in the near term,” Lagarde said. “In fact, we expect some pickup in growth in the second half of 2019 and into 2020.”
Global economic activity is set to benefit from the recent policy responses, such as the Federal Reserve’s “more patient pace of monetary policy normalization” and increased stimulus in China, according to her.