At their latest annual meeting in Jackson Hole, Wyoming, US central bankers and economists focused on the changing market structure on account of the growing dominance of a few successful ‘superstar’ companies and the resultant impact on wages, inflation and growth. This has forced new words such as ‘monopsony’ and the ‘Amazon effect’ into the lexicon as bankers attempted to substantiate the problem of low wage growth and sluggish investment spending.
A monopsony, also called a buyer’s monopoly, is a market condition similar to a monopoly but where a large buyer, and not a seller, controls a sizeable proportion of the market and drives prices down. The Amazon effect has been coined to describe fast-changing pricing algorithms by the online retailer and its rivals, which could potentially lead to bigger swings in inflation — a bugbear for central bankers.
Jackson Hole papers
The symposium comes in the backdrop of overwhelming evidence of the growing clout of the world’s biggest companies. Last month, Apple Inc became the first US listed company to reach a $1 trillion market capitalisation. That month alone, it added around $140 billion to its market value, the same size as IBM or Nike’s entire market cap, according to CNBC data. Amazon’s market cap, as on August 2, was about $873 billion, Alphabet’s was $849 million and Microsoft’s, $818 billion. Outside of the US, PetroChina had touched the $1 trillion cap a decade ago while Saudi Aramco, the state-owned oil giant that intends to go public in 2019, was reported to have a valuation of $2 trillion, according to the Financial Times.
Key papers presented at the Jackson Hole Economic Policy Symposium include one by Alan Krueger, a Princeton economist, which argued that monopsony power is most likely part of the apparent puzzle of why wage growth is low. Nicolas Crouzet and Janice Eberly of Northwestern University, in another paper, noted that with the investment of modern corporations taking the form of intangible capital — such as software and patents rather than machines and other physical goods — low interest rate policies by central banks over the last decade failed to prompt more capital spending. MIT professor John Van Reenen analysed changes in market structure and contributors to business concentration while Harvard economist Alberto Cavallo presented evidence that algorithms used by Amazon and other online retailers, with their constantly adjusting prices, may result in increased fluctuations in overall inflation in the event of movements in currency values or other factors.
Concentration & inequality
French economist Thomas Piketty’s central message of a world of widening inequality perhaps set the ball rolling on this debate, especially his assertion that the level of inequality in the US was “probably higher than in any other society at any time in the past, anywhere in the world”. There has been mounting evidence by way of academic work on both sides of the Atlantic focusing on this trend, much before the issue came under the global spotlight at this year’s Jackson Hole meet.
An analysis in The Economist in 2016 showed that two-thirds of American industries had became more concentrated in the 2000s. A 2017 paper by Gustavo Grullon, Yelena Larkin and Roni Michaely reported that in the last 20 years, over three-quarters of US industries have become more concentrated and bigger companies have captured greater market share. A June 2018 research by The Economist and the Resolution Foundation has found that if the British economy is split into about 250 sectors, in nearly 60% of them the four biggest firms claim a larger share of revenues than they did a decade ago. That clout with the biggest firms “may allow them to charge higher prices for poor service, and pay lower wages”.
At Jackson Hole, MIT’s Van Reenen presented a paper that found that in recent decades, the “differences between firms in terms of their relative sales, productivity and wages appear to have increased in the US and many other industrialized countries”. Reenen’s assertion was that business concentration may be taking place due to globalisation and new technologies, which have changed the nature of competition, and not weakened it, and that may not be a matter of concern. According to his paper, the “growth of platform competition in digital markets has led to dominance by a small number of firms such as internet search (Google), ride sharing (Uber), social media (Facebook, Twitter), operating systems for cellphones (Apple, Android), home sharing (AirBnB), etc. Network effects mean that small quality differences can tip a market to one or two players who earn very high profits. The growth of such industries does not mean that competition has disappeared, rather its nature has changed”. There is more competition “for the market” rather than “in the market”, the paper asserted.
Harvard’s Cavallo studied pricing behaviours for large multi-channel retailers in the US over the last ten years and showed that, especially for supply shocks, “online competition increases both the frequency of price changes and the degree of uniform prices across locations”. His paper showed how online competition, with its shrinking margins, algorithmic pricing technologies, and the transparency of the web, can modify and twist the pricing behaviour of large retailers and affect aggregate inflation dynamics.
Beyond interest rates
Northwestern’s Crouzet and Eberly, in their paper, focused on the need to look beyond other levers than interest rate, “such as strengthening competition regulation and intellectual property rights enforcement, and encouraging the development of markets for intangible assets”. According to them, the rise of factors such as software, intellectual property, brand, and innovative business processes, collectively known as “intangible capital”, may have enabled the rise in industry concentration over the last two decades. Princeton’s Krueger’s paper said it is important for central bankers to “be aware of the impact of the growing use of monopsony power and non-competitive labor market practices on wages, employment and output”.
For global central bankers gathered in Jackson Hole this year, most of the academic work was focused on piecing together an explanation for why the ultra-low interest rates put in place after the 2007-2009 financial crisis failed to lift business spending as much as expected, resulting in slower than expected economic growth. The message, in the end, was an overwhelming assertion that as big firms get bigger and pack in more firepower, rate cuts as a policy tool may pack much less punch than before.