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June 2019, EB19-06

Economic Brief

Are Markets Becoming Less Competitive?
By Tim Sablik and Nicholas Trachter

National markets in many U.S. industries seem to be increasingly dominated
by large companies. Some policymakers have argued that this growing market concentration is a sign of weakening competition, but concentration by
itself does not necessarily translate into market power. It may be too soon to
reach a decisive conclusion about whether market power, not simply market
concentration, is on the rise.
Many sectors of the U.S. economy seem to be
increasingly dominated by a handful of large and
powerful players. The tech sector offers a number of well-known examples. The vast majority
of smartphones run software developed by one
of two companies — Apple or Google. For 98
percent of consumers, the talk and data services
that power those phones come from one of four
providers — Verizon, AT&T, T-Mobile, or Sprint.
And virtually all of the web-based searching
on phones and computers flows through one
of Google’s many platforms, to the point that
“googling” has become synonymous with internet searching in general.1
Other industries are exhibiting signs of growing
concentration as well. By one measure, concentration in the retail sector has increased by more
than 400 percent since 1982, and concentration in finance has more than doubled since
1992.2 Some policymakers have argued that this
growing concentration is a sign of weakening
competition. A 2016 report from the Council of
Economic Advisers (CEA) under former President

EB19-06 – Federal Reserve Bank of Richmond

Barack Obama highlighted this concern: “When
there is little or no competition, consumers are
made worse off if a firm uses its market power to
raise prices, lower quality for consumers, or block
entry by entrepreneurs.”3
The CEA report and other studies point to signs
of rising market concentration and falling entry
rates for new firms as evidence that markets are
becoming less competitive. But while firms with
market power are indeed more likely to operate in concentrated markets, concentration by
itself is not necessarily a sign of market power.
Markets could become concentrated because
the most efficient companies outperform their
less-productive competitors, for example. Such
an outcome presumably would make consumers better off, not worse. Indeed, many sectors
of the economy follow a life cycle in which the
number of competitors gradually shrinks over
time. Mature industries consolidate around the
most efficient firms, and this consolidation is
not necessarily the result of anticompetitive

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Thus, a key question for policymakers is whether
market power, not simply market concentration, is
on the rise. Researchers have been hard at work attempting to answer this question. But, as this Economic Brief will show, it may be too soon to reach a
decisive conclusion.
Why Market Power Matters to the Fed
The Federal Reserve is among the policy institutions
keeping a close eye on competition. If firms’ market power is rising, that could result in a number of
changes for the economy that matter for monetary
policy. Monopolistic firms would tend to charge
higher prices above their costs of production and
underproduce compared with those in competitive
environments. The ratio of price to cost is known as
the firm’s “markup.” A recent study found that “the
welfare costs of markups are large,” primarily because
they act as a tax on output.5 Firms with more market power also may invest less, resulting in slower
productivity growth.6 To the extent that this behavior
is widespread across industries, it could lead to a
general slowdown in productivity and, as a result,
impair long-run economic growth.
It might be natural to infer that higher markups
also would result in higher inflation, something that
certainly would be a concern for the Fed. However,
the relationship between markups and inflation is
not entirely straightforward. Inflation is a measure
of rising prices generally, but markups measure how
much individual firms set prices above their costs.
Thus, it is possible for markups to rise because firms
facing little competition are able to set prices high
or because efficient firms have found ways to reduce
their costs while keeping prices stable. In the latter
case, prices and inflation could remain flat. Inflation
also measures the rate of change in prices across a
period of time (typically year-over-year). As a result,
even if markups were rising because firms with
market power were raising prices, they would need
to do so across time and across industries in order to
have an impact on inflation. It also may be difficult to
discern a connection between markups and inflation
if the Fed is pursuing monetary policy that offsets
inflationary pressure from markups.

Rising market power also has implications for maximizing employment, the other component of the
Fed’s dual mandate. Basic economics implies that
businesses with market power withhold at least
some production in order to keep prices high. Thus,
if firms produce less due to a lack of competition,
they also may hire fewer workers, which could raise
unemployment or, in the long run, reduce workforce
participation. And, to the extent that firms have the
power to set wages in labor markets, they may be
able to pay workers less.
The Fed tracks wage growth both as a sign of labor
market health and as a signal of labor productivity.
In a competitive environment, the largest portion
of firms’ productivity gains should be passed on to
workers in the form of higher wages. Firms compete
for labor, and the most productive firms will pay
more for workers to expand production. But if firms
face less competition for workers, they can reap the
rewards of higher productivity as pure profits rather
than passing them on in the form of wage increases.
Thus, market competitiveness matters for how the
Fed interprets changes in the rate of wage growth.
Slow wage growth in a competitive market could
be a sign of slowing productivity and economic
growth, which might bolster the case for expansionary monetary policy. But slow wage growth in an
increasingly monopolistic environment may not
be a sign of slowing productivity because gains
from productivity could be going to firm profits. In
this case, the argument for expansionary monetary
policy is weaker.
Higher market power also may reduce the effectiveness of the Fed’s traditional monetary policy tool
of influencing short-term interest rates. As noted
earlier, firms with more market power may produce
and invest less, depressing aggregate productivity growth. There is also some evidence that weak
investment on the part of firms may depress the
natural rate of interest in the economy. In a 2016
paper, Callum Jones of the International Monetary
Fund and Thomas Philippon of New York University’s Stern School of Business found that, given firm
profitability, corporate investment in the United

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States has been lower than expected since the
early 2000s. Had investment been more in line with
expectations, they estimated that interest rates
would have begun rising away from near-zero levels
starting at the end of 2010 rather than in 2016,
when rates actually did increase.7 To the extent that
increased market power among industry leaders is
contributing to lower investment and real interest
rates, the Fed may encounter the zero lower bound
more often.
Firms with more market power also may be less responsive to monetary policy stimulus. One way that
the Fed stimulates the economy during a downturn
is by reducing the cost of capital by pushing interest rates down. But if firms are less inclined to invest
because of market power and they have the ability
to capture higher profits through markups, they
may absorb some of the interest rate changes in
the form of profits rather than investing more.8 This
result would tend to make traditional monetary
policy less effective.
Clearly there are many reasons for the Fed to be
concerned about a general increase in market
power in the economy. But determining whether
market power is actually going up is a challenge.
Economists cannot directly measure changes in
market power, but they can attempt to infer its presence by looking at other indicators, such as changes
in industry concentration, markups, and firm profitability. Unfortunately for policymakers seeking clear
guidance, the evidence in each of these cases has
thus far been mixed.
Are Markets Becoming More Concentrated?
Increasing market concentration may be one of the
most visible signs of rising market power. Firms with a
large market share presumably face less competition
than firms in markets with many players. Beyond the
examples noted at the beginning of this Economic
Brief, researchers have documented a general rise in
concentration across industries. One striking finding comes from a paper by Gustavo Grullon of Rice
University, Yelena Larkin of York University, and Roni
Michaely of the Geneva Finance Research Institute.

They found that concentration levels have increased
in more than three-quarters of U.S. industries over
the past two decades. Moreover, the market shares
of the four largest firms in most industries have
increased, and both the average and median size of
public firms (which tend to be larger than private
firms) have tripled.9
As noted at the outset of this Economic Brief, rising
concentration alone does not necessarily mean that
market power is going up. Firms with large market
shares still may be subject to competitive pressures
from new entrants, for example. But research showing that startup activity has fallen since 2000 suggests that firms may be facing less outside pressure
today than in the past.10
Another way concentration could rise without a
comparable increase in market power is if the most
efficient firms are capturing greater market share by
outcompeting their rivals. Such a scenario would be
less troubling for consumer welfare than monopolistic firms abusing market share. To address this point,
Grullon, Larkin, and Michaely looked at data on
stock market reactions to mergers and acquisitions.
If firms are more profitable in concentrated markets because they face less competition, the authors
reasoned that “the market should react more positively to announcements of transactions that further
erode product market competition.” Indeed, they
found that the market reaction to mergers was more
positive when the merger involved firms in concentrated industries.
While these findings seem to suggest that the
recent rise in concentration is a sign that market
power has been going up, such conclusions depend
crucially on how one defines the market. Evidence
presented by Grullon, Larkin, and Michaely, as well
as others, shows concentration has gone up in
national industry groups. But in many industries,
competition happens locally not nationally. For
example, Walmart may account for a large share of
national retail sales, but in any given market, it may
compete with other national chains as well as locally owned stores.

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One of the authors of this Economic Brief (Trachter)
along with Esteban Rossi-Hansberg of Princeton
University and Pierre-Daniel Sarte of the Richmond
Fed highlighted this distinction in a recent paper.11
Using data from the U.S. National Establishment
Time Series, they found that while national industry
concentration rose on average from 1990 through
2014 across a variety of industry groups, local
concentration in those same industries actually declined.12 (See Figure 1.) Moreover, these two trends
appear to be strongly correlated: a large fraction
of workers in the economy are employed by industries that had both rising national and falling local
It would appear that rather than forcing the exit of
local competitors when they enter a market, national
brands such as Walmart or Starbucks simply add to
the competition. To the extent that local competition
determines market power, the findings that national
industry concentration has been increasing may not
be cause for alarm.

Measuring Markups
Rising markups could be another sign that firms are
gaining market power. In a competitive environment,
markups should be low. If firms tried to substantially
raise their prices above their costs, new companies
would enter the market to undercut them, driving
the markups down. Thus, some researchers have
pointed to evidence of higher markups as proof that
markets have become less competitive.
One of the leading studies in this area of research
comes from Jan De Loecker of Katholieke Universiteit
Leuven and Jan Eeckhout of the Barcelona Graduate
School of Economics. In a 2017 paper, they found
that markups increased substantially across all U.S.
industries, from 21 percent in 1980 to 61 percent in
2016.13 (See Figure 2 on the following page.) They
found a similar increase in markups for firms globally
in another paper, though the trend was strongest
in North America and Europe.14 Tying these results
to observations of rising market concentration, De
Loecker and Eeckhout found that the increase in

Average Industry Concentra�on Has Diverged Na�onally and Locally
1990 and Locally since 1990
Figure 1: Average Industry Concentration Has Diverged

National Manufacturing
Na�onal Manufacturing
National Wholesale Trade
Local manufacturing
National Retail Trade
Na�onal Wholesale Trade
National FIRE
Local Wholesale Trade
National Services
Na�onal Retail Trade
Local Manufacturing
Local Retail Trade
Local Wholesale Trade
Na�onal FIRE
Local Retail Trade
Local FIRE
Local FIRE
Na�onal Services
Local Services
Local Services

Average Change in Concentration (HHI)

Average Change in Concentra�on (HHI)


















Source: Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter, “Diverging Trends in National and Local Concentration,”
Federal Reserve Bank of Richmond Working Paper No. 18-15R, September 2018, revised February 2019.
Notes: Concentration is measured using the Herfindahl-Hirschman Index (HHI), which compares total sales for firms in an industry
to the number of firms in that industry. FIRE stands for finance, insurance, and real estate.

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For example, decisions about how to measure firm
costs can change the result of markup estimates.
Other researchers found that including the costs
that firms face in marketing and delivering their
products and services to consumers may largely account for the increase in markups.15 These indirect
costs have become a larger share of firms’ variable
costs since 1980, and it may be these rising costs
rather than rising prices that De Loecker and Eeckhout measured.16
Given these measurement challenges, it is not yet
clear whether estimates of rising markups necessarily
point to rising market power. Researchers also have
looked at whether firms in concentrated markets
have more pricing power over their inputs of production, such as labor. If so, that might also suggest
a rise in market power. Multiple studies do find that
firms in concentrated sectors are able to pay lower
wages.17 But, again, to the extent that firms compete
for labor locally in the same way that they compete
for customers locally, it is important to study the ties
between local concentration and wages.
A 2018 paper by Kevin Rinz from the U.S. Census Bureau found that while firms in concentrated sectors
are able to pay lower wages, local employer concentration actually has been falling since the 1970s (in
line with the findings of Rossi-Hansberg, Sarte, and


Percent above Marginal Cost

While this research has received a lot of attention,
measuring markups across the entire economy and
across time has historically proven difficult to do. It
requires economists to model industry competition
and to make assumptions about how firms behave in
order to estimate their marginal costs, which typically are not publicly known. These constraints have
tended to limit economists to studying markups
only in specific sectors of the economy where good
data were available. De Loecker and Eeckhout took a
different approach in order to overcome these constraints, but their findings remain a source of ongoing debate among economists.


Percent above Marginal Cost

markups has been driven by the top firms by market
share in each industry.

Average Markups across the U.S.
Figure 2: Average Markups
across the U.S. Economy









Source: Jan De Loecker and Jan Eeckhout, “The Rise of Market
Power and the Macroeconomic Implications,” NBER Working
Paper No. 23687, August 2017.

Trachter). This result would suggest that firms’ pricing
power in terms of labor is actually falling in the geographies that matter most for employees.18
Rising Profits, Falling Investment
Some economists have looked at a third potential
signal of rising market power: rising profits for the
largest firms. As in the case of markups, measuring
profits is challenging because they are typically not
directly observable. Instead, researchers have proposed novel ways of inferring them from the data
available. For example, the London Business School’s
Simcha Barkai examined the share of production
accruing to labor and capital costs, which are known,
and reasoned that any remainder must be accruing
to firms in the form of profits.19 He found that both
the labor and capital shares have fallen over the past
three decades, suggesting that the profit share has
increased substantially over the same period.
But, as with markups, the difficulty of measuring firm
profits has sparked disagreements among researchers. One study extended Barkai’s methodology to the
pre-1980 period and found that profits and productivity growth should have been much more volatile
than what was actually observed over those decades
if Barkai’s assumptions were correct.20 Economists

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also disagree over what may be driving the fall in
capital and labor shares. David Autor of the Massachusetts Institute of Technology and his coauthors
found that large firms in concentrated industries
have higher productivity growth per worker than
other firms, and this greater efficiency results in
these “superstar” firms spending a smaller share of
their total sales on labor income.21
Another dispute is whether capital investments have
truly shrunk or whether they are being mismeasured.
Nicolas Crouzet and Janice Eberly of Northwestern
University’s Kellogg School of Management found
that the rise of intangible assets since the 2000s can
explain much of the capital investment shortfall.22
They found that intangible investments have been
associated with productivity gains in some industries, such as the tech sector, suggesting that rising
market concentration could be a symptom of greater
efficiency and productivity.
On the other hand, intangibles also can be used
by large firms to defend their market power from
competitors. Research and development are often
nonrival and excludable, which means other firms
could benefit from that knowledge without diminishing the ability of the originating firm to use it, but
legal restrictions such as patents and copyrights can
make those assets exclusive to the owner. Such exclusivity promotes investment in intangibles, but it also
may contribute to industry concentration by allowing
firms to benefit from economies of scale and solidify
their market power. Additionally, as firms face less
competition, they may have fewer incentives to invest
in both intangible and tangible capital.23 Ultimately,
as in the case of markups, the evidence on profits and
investment remains inconclusive and evolving.
An Unsettled Debate
As the preceding survey of the literature on this
topic shows, there is evidence both for and against
the rise of market power in the modern economy. In
many cases, this conflicting evidence reflects different interpretations of phenomena that are inherently
difficult to measure. Many economists agree that
national industry concentration has been rising. But

is this because the economy is increasingly driven by
firms that rely on network effects and other economies of scale that naturally produce large winners?
Or are large firms investing in assets protected by
patents and copyrights to keep out competitors?
Could both explanations be at play? Some of the
apparent contradictions in evidence also may be explained by industry concentration trending up at the
national level at the same time it is falling locally. This
possibility raises another important question: Should
policymakers be worried about higher national concentration when most markets for goods, services,
and labor are local?
Unfortunately, the research does not yet provide decisive answers to these questions. It also could be the
case that these trends are being driven by other factors unrelated to market competition. A recent study
argues that the decline in new firm creation and the
rise in market concentration can be explained by the
aging U.S. population. The authors argue that as baby
boomers age and retire, labor force growth is shrinking, leading to less startup activity. Existing firms age
and grow, leaving even fewer workers to fuel startups and driving the rise in industry concentration.24
Another study based on a model found that industryleading firms have stronger incentives to invest in a
low interest rate environment than laggard firms. To
the extent that this is the case, the low interest rates
of the past decade could have contributed to rising
concentration as leaders continued to invest and pull
further away from smaller competitors.25
In summary, there is no shortage of explanations for
the observed phenomena of rising market concentration and markups, and not all of those explanations point to a commensurate increase in market
power. In his own review of the evidence, University
of Chicago economist Chad Syverson summarized
the debate this way: “The macro market power
literature has offered an immense service by documenting and emphasizing the potential connections between several trends: labor’s declining share
of income, increasing corporate profits, increasing
margins, increasing concentration, slower productivity growth, decreasing firm entry and dynamism, and

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reduced investment rates. … Where the literature, at
this point at least, has not yet reached a conclusion is
whether and to what extent increases in the average
level of market power in the industry is responsible
for each or all of these trends.”26
Until that conclusion is reached, this topic will remain
an important area of research in the years to come,
and policymakers should weigh evidence carefully
before deciding whether to respond to allegations of
rising market power.
Tim Sablik is an economics writer and Nicholas
Trachter is a senior economist in the Research Department at the Federal Reserve Bank of Richmond.


 yan Decker, John Haltiwanger, Ron Jarmin, and Javier
Miranda, “The Role of Entrepreneurship in U.S. Job Creation
and Economic Dynamism,” Journal of Economic Perspectives,
Summer 2014, vol. 28, no. 3, pp. 3–24.


E steban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas
Trachter, “Diverging Trends in National and Local Concentration,” Federal Reserve Bank of Richmond Working Paper No.
18-15R, September 2018, revised February 2019.


 ational and local banking also exhibit this trend. See Lawrence J. White, “Antitrust and the Financial Sector,” Money and
Banking blog, January 21, 2019.


J an De Loecker and Jan Eeckhout, “The Rise of Market Power
and the Macroeconomic Implications,” NBER Working Paper
No. 23687, August 2017.


J an De Loecker and Jan Eeckhout, “Global Market Power,”
NBER Working Paper No. 24768, June 2018.


J ames Traina, “Is Aggregate Market Power Increasing? Production Trends Using Financial Statements,” University of Chicago
Booth School of Business New Working Paper Series, No. 17,
February 2018; Loukas Karabarbounis and Brent Neiman,
“Accounting for Factorless Income,” NBER Working Paper No.
24404, March 2018, revised June 2018.


 e Loecker and Eeckhout addressed this concern in more
recent work with Gabriel Unger of Harvard University. They
acknowledged that while such overhead as a share of costs
has gone up in recent decades, it still cannot fully explain the
rise in markups they found. See Jan De Loecker, Jan Eeckhout,
and Gabriel Unger, “The Rise of Market Power and the Macroeconomic Implications,” Manuscript, November 22, 2018.


J osé Azar, Ioana Marinescu, and Marshall I. Steinbaum, “Labor
Market Concentration,” NBER Working Paper No. 24147, December 2017, revised February 2019; Efraim Benmelech, Nittai
Bergman, and Hyunseob Kim, “Strong Employers and Weak
Employees: How Does Employer Concentration Affect Wages?”
NBER Working Paper No. 24307, February 2018.


 evin Rinz, “Labor Market Concentration, Earnings Inequality,
and Earnings Mobility,” U.S. Census Bureau CARRA Working
Paper No. 2018-10, September 24, 2018.


S imcha Barkai, “Declining Labor and Capital Shares,” Manuscript, 2017.


 arabarbounis and Neiman (2018).


 utor et al. (2017).


 icolas Crouzet and Janice Eberly, “Understanding Weak
Capital Investment: The Role of Market Concentration and
Intangibles,” Federal Reserve Bank of Kansas City Economic
Policy Symposium Proceedings, Jackson Hole, Wyoming,
August 24, 2018.


 ermán Gutiérrez and Thomas Philippon, “Investment-Less
Growth: An Empirical Investigation,” NBER Working Paper No.
22897, December 2016, revised January 2017.


 ugo Hopenhayn, Julian Neira, and Rish Singhania, “From
Population Growth to Firm Demographics: Implications for
Concentration, Entrepreneurship, and the Labor Share,” NBER
Working Paper No. 25382, December 2018.


F or other examples, see Open Markets Institute, “America’s
Concentration Crisis,”


 avid Autor, David Dorn, Lawrence F. Katz, Christina Patterson,
and John Van Reenen, “Concentrating on the Fall of the Labor
Share,” American Economic Review: Papers and Proceedings
2017, May 2017, vol. 107, no. 5, pp. 180–185.


 ouncil of Economic Advisers, “Benefits of Competition and
Indicators of Market Power,” Issue Brief, April 2016.


 ichael Gort and Steven Klepper, “Time Paths in the Diffusion
of Product Innovations,” Economic Journal, September 1982,
vol. 92, no. 367, pp. 630–653.


 hris Edmond, Virgiliu Midrigan, and Daniel Yi Xu, “How Costly
Are Markups?” NBER Working Paper No. 24800, July 2018.


I t’s also possible for this relationship to go in the opposite
direction. Firms protected from competition may invest more
knowing that they can reap all of the rewards of innovation
themselves. This is the rationale behind patent protections in
some fields, such as pharmaceuticals, where initial research
and development is costly but replication is relatively cheap.
Firms exposed to competition might choose to forgo costly
research and instead free-ride on the efforts of other companies, resulting in fewer new drugs being developed. In theory,
giving a firm temporary monopoly over a new drug provides
an incentive to undertake costly research.


 allum Jones and Thomas Philippon, “The Secular Stagnation
of Investment?” Manuscript, December 2016.


J ohn Van Reenen, “Increasing Differences between Firms: Market Power and the Macro-Economy,” Federal Reserve Bank of
Kansas City Economic Policy Symposium Proceedings, Jackson
Hole, Wyoming, August 24, 2018.


 ustavo Grullon, Yelena Larkin, and Roni Michaely, “Are U.S.
Industries Becoming More Concentrated?” Review of Finance,

Page 7


E rnest Liu, Atif Mian, and Amir Sufi, “Low Interest Rates, Market
Power, and Productivity Growth,” NBER Working Paper No.
25505, January 2019.


Chad Syverson, “Macroeconomics and Market Power: Facts,
Potential Explanations and Open Questions,” Economic Studies
at Brookings, January 23, 2019.

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Views expressed in this article are those of the authors
and not necessarily those of the Federal Reserve Bank
of Richmond or the Federal Reserve System.

Market Structure and the
Macroeconomy Workshop
The Federal Reserve Bank of Richmond held a
workshop in May 2019 about market power
and concentration. Watch the presentations on
YouTube or view the agenda on our website.

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