How power dynamics and competition is impacting economies and consumers across the globe

How are shifts in market power impacting competition and the nature of capitalism? Hélène Rey, Professor of Economics at London Business School, Martin Wolf, chief economics commentator at the Financial Times, Joseba Martinez, Professor of Economics at London Business School, were joined in conversation with Thomas Philippon, Professor of Finance at New York University, Stern School of Business, to discuss competitive trends in Western economies, how China is influencing capitalism and the potential impact of Covid-19.

  • The concentration of the US market into fewer firms has resulted in outsized influence being held by large, incumbent companies, to the detriment of the American economy;
  • Lobbyists are protecting incumbent firms, allowing for a greater concentration of power in fewer large companies and punishing consumers;
  • Technology companies, which dominate the marketplace currently, are no more dominant than the leading firms over the last 5 decades, representing the same proportion of the economy as their historic peers;
  • More cross-national learning and collaboration needs to take place to enhance the customer experience;
  • The strength of the Chinese economy has been brought about independent of Government policy, and state interference is the greatest risk to the productivity of China’s firms;
  • COVID-19 risks the failure of SMEs, concentrating power into even fewer big firms, at a cost to consumers, but should also lead to progress in digital innovation and capabilities for all firms.

America’s crown as the fulcrum of competition, the land of opportunity and the originator of innovation has slipped

Philippon, author of ‘The Great Reversal: How America Gave Up On Free Markets’, articulates how market concentration and low competition has become the new normal in America, resulting in higher profits for the largest, incumbent firms, while depressing wages and limiting opportunities for investment, innovation, and growth. According to Philippon, increases in lobbying against competition and poor regulatory oversight has inexorably led to higher prices for consumer goods and utilities in the United States compared to Europe—a complete reversal of recent history and perception.

Illustrated through analysis of the cost of internet access and the mobile phone market, comparing why prices are considerably higher in the US compared to Europe, Philippon argues that American markets, once a model for the world, are giving up on healthy competition. He shows that there is greater market concentration than twenty years ago, with dominance from fewer and bigger players who lobby politicians aggressively to protect and expand their profit margins. This has the effect of driving up prices while driving down investment, productivity, growth, and wages, resulting in more inequality. On the other hand, Philippon looks at Europe, traditionally dismissed for competitive sclerosis and weak antitrust, as the bastion for competitive capitalism, beating America at its own game.

The EU’s structure enables competitive equilibrium across member states

European competition policy takes agreement from 18 countries who lack political unity and therefore need independence, a level playing field and balanced regulation for the system to work, forming competitive equilibrium. For most of the 20th Century, the US was seen as the world leader in allowing competitive tension to enhance the performance of companies and the economy. However, in the US, erosion in anti-trust standards has led to a drop in performance. Post-9/11, the political system was shaken and there was relaxation of policies which encouraged competition.

According to Philippon, a process to reverse this trend does not have to start in Washington. At the state level, there is less ideology and they compete for companies and institutions. He hopes there is a pragmatic approach that could be regained at the state level, as there is increased interest in learning from how other countries and benchmarking against performance internationally. However, he warns that the Supreme Court will have to reform campaign finance, but this will require political will that is lacking.

While the EU has been able to enforce US-style anti-trust law which has strengthened the competitive balance in Europe, there is more to do when it comes to investing in knowledge centres, such as well funded universities and private research, an ecosystem for nurturing companies and access to the wider US single market. Philippon believes these pillars of the US economy still differentiate the marketplace so that it maintains competitive advantage, enabling companies such as the technology giants to prosper.

The power of lobbyists is restricting productivity growth and worsening the deal for consumers

Philippon cites two examples where international cooperation can ultimately benefit consumers: the diesel emissions scandal, which was ignored in Europe and discovered by researchers in California, and data privacy laws which hold on US technology firms to a higher standard, which have been implemented in Europe but remain unimplemented in America. Both instances show how lobbying can ensure regulators turn a blind eye to bad behaviour, as opportunities for the cross-exchange of ideas which can be useful for consumers.

The power of the technology firms is not as unprecedented as people believe

The large technology firms were initially able to achieve such great market share because they were better than their competition and provided a superior experience, and price, to their peers. However, Philippon believes how these companies are protecting themselves and defending themselves from competition is not necessarily healthy. There needs to be some regulatory solutions to ensuring competition between big-tech companies and start-ups. Philippon also draws a parallel between the scale and strength of large companies at the moment and likens it to the strength of other top firms over the last 50 years, commenting that there is nothing unique regarding the features they display and the dominant firms at the moment. GE and GM performed better than their peers a decade ago, and the reality is the top 5 firms of the ‘50s, ‘60s, 70s were more profitable than the rest and represented the same proportion of the stock market value as the leading firms do today. The coronavirus pandemic might strengthen the technology companies and increase their concentration.

Concentration in the US retail banking sector has stifled innovation, pulling it behind European peers

Consumers in Europe get a much better service from retail banks than peers in the US. There is a lack of competition and innovation through fintech; the big banks have killed attempts from fintech to increase data sharing and improve the customer experience in America. This has been brought about because regulation in Europe is arms-length through the ECB and cross-border, whereas in the US lobbyists can influence regulators more directly. European banks have a lower profit margin, indicating the consumers are getting a better deal. However, there is still an opportunity in Europe to learn from the Americans when it comes to financial markets and asset management. Both sides of the Atlantic could learn from each other if they were so inclined.

Efforts to stabilise the financial markets after the GFC have proven to be a success

When you consider we only experienced a painful Global Financial Crisis less than a decade ago, Philippon states that many of the measures that were put in place as a result of the last crisis have worked and provided the financial stability required during the COVID-19 crisis. While there is always more that can be done, the big picture is a success, the lack of financial panic during the pandemic is a success.

Regulators need to be strong and independent to protect the market economy

The fragility of capitalism is based on a lack of coordination and collective action across different beneficiaries. Institutions are designed to counter issues relating to a lack of collective action, but market institutions are one stakeholder among many, while competition is a public good, rather than what individuals or leaders would opt for. Regulators need to be independent and support from the political system to protect monopoly processes. While this might be idealistic, there is an imperative that, according to Wolf, we need to fight for and protect the market system so that it operates independently of political processes and prevents incumbents from protecting their resources.

Philippon believes that eventually, consumers will force a political majority that swings the pendulum back to enforcing more competition, despite there being power and wealth in the hands of people who benefit from there being less competition, as it increases the value of the shares they own. Similarly, the EU needs to keep vigilant to prevent dilution of their position.

State actors will hinder the productivity of the Chinese economy, not enhance it

Wolf believes the driving force behind the rise of China has been market forces independent of the Communist Party’s industrial policy. According to Wolf, the great success of the Chinese market has been driven through opening up their markets to foreigners and allowing new private enterprises. The most effective capitalist system was China in the 2000s, where the Chinese private sector grew unhindered. The strongest firms in the Chinese economy operate and were formed outside of the government system. The main risk to their economy is the state striking back, with evidence that political leaders are monopolising the economy and turning companies into state enterprises. China has many hard, working enterprising people it will take time to ‘kill’ the economy and even if productivity halves, the size of the economy will still be larger than the US and Europe.

Imagine if COVID-19 was an online virus rather than a physical one

The recession brought about by Coronavirus will kill more small firms than big ones, with the danger that many SMEs fail, while big firms can survive because they have additional liquidity, resulting in further consolidation and market concentration. The first line of defence, according to Philippon, are fiscal support programmes that countries such as France and Germany have instituted to make sure small companies do not collapse. However, with aviation as an example, Lufthansa and Air France are being looked after very differently to companies such as EasyJet and Ryanair, showing that support for large, state-backed carriers, rather than smaller disruptors.

Tech companies are fortunate that COVID-19 was a health virus, rather than one that hit computer systems, which would have led to greater opportunity for small physical stores and restaurants. Instead, the human nature of the pandemic means there is a greater shock for brick and mortar stores and less of a shock for those that operate online. Philippon stresses that companies such as Zoom should not be targeted by the large players and remain independent, preventing further consolidation. However, there is also an opportunity for the rest of the economy, where leaders should push for digital transformation, as every firm now understands it is important for them to operate efficiently online.


Thomas Pillipon’s conversation with Martin Wolf, Hélène Rey and Joseba Martinez is part of the Wheeler Institute’s Rethinking Capitalism series. Please follow the link for the next webinar of the series, hosting Rebecca Henderson, John and Natty McArthur University Professor from Harvard University, discussing her latest publication “Reimagining Capitalism In a World on Fire”. A fireside conversation with Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at London Business School.

Hélène Rey is Professor of Economics at London Business School. Her research focuses on the determinants and consequences of external trade and financial imbalances, the theory of financial crises and the organisation of the international monetary system. She demonstrated in particular that countries gross external asset positions help predict current account adjustments and the exchange rate. Professor Rey is a Fellow of the British Academy, of the Econometric Society and of the European Economic Association. She is on the board of the Review of Economic Studies and associate editor of the AEJ: Macroeconomics Journal.

Martin Wolf is chief economics commentator at the Financial Times and widely regarded as one of the most influential economics journalists in the world. He is visiting fellow of Nuffield College, Oxford, a Special Professor at the University of Nottingham and an honorary fellow of the Oxford Institute for Economic Policy. He has been a forum fellow at the annual meeting of the World Economic Forum in Davos since 1999. Wolf has been named in the top 100 lists of global thinkers by Prospect and by Foreign Policy magazine.

Thomas Philippon, is the Max L. Heine Professor of Finance at New York University, Stern School of Business. Philippon has studied various topics in macroeconomics and finance: systemic risk, crisis resolution mechanisms, the dynamics of corporate investment and household debt, and the size of the finance industry. His recent work has focused on the Eurozone crisis, financial regulation, and the market power of large firms. He currently serves as an academic advisor to the Financial Stability Board and to the Hong Kong Institute for Monetary and Financial Research.

Joseba Martinez is a macro- and financial economist whose research interests include the effect of automation on productivity, economic growth, and income distribution. In addition, his work on the optimal design of banking system stress-tests has been published in the Review of Economic Studies. He consults for a New York-based investment fund and has been a visiting scholar at the International Monetary Fund.

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