Economic Growth

What the rise of powerful companies means for the open market

A bird flies between the buildings in the early morning mist in London's Canary Wharf financial district, Britain March 28, 2017.  REUTERS/Russell Boyce - RC17DA90A520

Monopolies could lower investment, stifle growth and drive down wages. Image: REUTERS/Russell Boyce

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People are concerned that the rising power of big successful companies could lower capital investment, weaken productivity, and reduce people’s take-home pay.

While rising corporate market power has had a fairly limited negative economic impact so far, if left unchecked, it could take a bigger toll on growth and people’s income.

Our Chart of the Week from the April World Economic Outlook analyzes nearly 1 million companies from 27 advanced and emerging market economies since the early 2000s and shows that firms’ average price markup—the ratio of a company’s product price to its production cost—has increased moderately.

Image: International Monetary Fund

Across advanced economies, average markups increased by 8 percent since 2000 but by less than 2 percent in those emerging economies covered by the analysis. This increase in market power has taken place in most industries, but it has been driven by a small fraction of companies.

The chart shows that companies with the highest markups, those in the top 10 percent, raised theirs by over 30 percent since 2000, while markups have been largely flat among the remaining 90 percent of companies.

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Across advanced economies, average markups increased by 8 percent since 2000.

These high-markup companies vary in size but perform better than others. On average, they are about 50 percent more profitable, over 30 percent more productive, and use 30 percent more intangible assets, like patents or software, than others.

That’s because 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 (when a product or service gains additional value as more people use it), and economies of scale (reduced costs per unit as output increases).

Keep market competition strong

Policymakers around the world need to ensure a level playing field among all companies, including new ones. This means lowering domestic barriers to entry, for example, by reducing administrative burdens on start-ups, and reducing barriers to trade and foreign direct investment, especially in services.

This also means strengthening some features of competition law and policies, such as the role of market examinations, reforming corporate taxes to tax the excess returns on capital derived from market power, and ensuring that intellectual property rights encourage groundbreaking innovations more than incremental ones.

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The views expressed in this article are those of the author alone and not the World Economic Forum.

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Economic GrowthFinancial and Monetary Systems
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