Question

Economic profits have risen in the US economy since the financial crisis of 2008. Among the four economic structures we are currently studying, the models of pure competition and monopolistic competition predict that in such an environment we will observe competitive firms emerging to capture a share of these increased profits, but then for there to be an eventual return to normal profit levels.

Instead, we have observed increased consolidation and, hence, increased ownership concentration over the past decade. This continued the trend toward oligopoly we had been experiencing during the previous decade. Thus, instead of observing firms aggressively entering the markets, we have watched the rate of small-firm creation dip close to the lowest level it has been since the 1970s.

The reality is we have observed a significant increase in industry concentration ratios in most of our major economic sectors since 2008 (indeed, over $12 trillion in mergers have transpired since 2008). In particular, measured four-firm concentration ratios have now risen to almost 50% in the IT, telecom, media and manufacturing sectors. This movement towards increased concentration has not occurred without some governmental help. For instance, Alphabet [i.e., Google] alone spent close to $20 million in lobbying efforts just last year to gain favorable legislation and improve its market share; and Alphabet is not an isolated case in the lobbying efforts of firms seeking to bend the rules to meet their needs.

In whole, since 1997 the industry-wide four-firm concentration ratio for our entire economy has risen from 25% to its current mark of approximately 33%. Only the arts, recreation, education, professional services, hospitality, healthcare, and a few other similar service areas have concentration ratios still sitting below 20%; and, except for education and healthcare, even these concentration ratios have been increasing.

Do you feel that this trend toward a more oligopolistic economic environment will be fruitful for the US in the long run? …or should we be taking steps to reverse the trend and promote a more competitive economic environment? What do you think will be the economic, social and/or political costs and benefits of continuing to move away from a competitive market-oriented economic structure towards a more oligopolistic market structure? What would have to change to move us back in the direction of a more competitive environment? Explain and give detailed examples.

Answer 1

No it is not beneficial. We should reverse trend. The costs will be rent seeking, consumers will loose as they will pay high prices and consume less. It will led to output which is less than social optimum. Thus it will result in inefficiency. The benefit is concentrated industries spend more on Rand D. They have better marketing, management capabilities and can face foreign competitors quite well. We need to give protection to small and medium enterprises E. G Govt can favour small and medium enterprises in its procurement. It can give them tax benefits and concessions. Laws should also be made stringent and implemented strictly.