The Great Reversal Thomas Philippon NYU, NBER, CEPR Chicago, March - - PowerPoint PPT Presentation

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The Great Reversal

Thomas Philippon

NYU, NBER, CEPR

Chicago, March 2020

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Cost of Internet Access, 2018

Rank Country Broadband Cost 40 France $ 31 43 South Korea $ 32 53 Germany $ 37 ... 119 US $ 68

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Concentration and Markup: Telecom

−.2 −.1 .1 .2 .3 CR8 .1 .2 .3 .4 .5 Mark−up 1990 2000 2010 year Mark−up CR8

Panel A: Telecom

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US: After-Tax Net Profit Margins

.04 .06 .08 .1 .12 1970q1 1980q1 1990q1 2000q1 2010q1 2020q1

Panel B. Profits/VA

Source: FRED Non Financial Corporates.

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The Rise in US Concentration

2 4 6 8 1980 1990 2000 2010 Manufacturing Non−Manufacturing

Panel A. Cumulative Change in CR8 (%)

Source: U.S. Economic Census for all Businesses. Dashed lines because of changes in industry classification from SIC to NAICS.

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Two Big Questions

• Good vs. Bad Concentration?
• Good concentration: low prices and productivity growth
• e.g, retail & wholesale trade
• returns to scale; intangible investment
• Bad concentration: high prices and low productivity
• e.g., telecoms, airlines, healthcare
• what are these barriers?
• Technology vs. Policy?
• Network effects vs regulation & antitrust

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Walmart

.2 .4 .6 Market Share .04 .05 .06 .07 .08 Profit Margin 1970 1980 1990 2000 2010 2020 year Profit Margin Market Share

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Good Concentration / Bad Concentration

−.4 −.2 .2 .4 .6 1995 2000 2005 2010 2015 year PC1: "Intangibles" PC2: "Barriers to Entry"

Average scores for PC1 and PC2

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Technology or Policy

What about Europe?

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PMR Reforms in EU

−.5 .5 1 1.5 Average # of Reforms 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: Duval et al. (2018).

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Comparison of Telecom Prices in FR vs US

.7 .8 .9 1 1.1 1.2 Relative price 2004 2006 2008 2010 2012 2014 year

Relative Price of Communication in France

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Regulation: US vs EU

GRC GRC GRC GRC POL POL POL POL

1 1.5 2 2.5 3 1995 2000 2005 2010 2015 Year EU US

Source: OECD PMR.

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Markups EU vs US

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The MissingTrillion Dollar

• Monthly savings per households: $300
• Nationwide annual household direct savings: $600 billion
• General equilibrium impact of returning to competitive

markets

• GDP: $1 trillion
• Labor Income: $1.25 trillion
• Profits: -$250 billion

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What Happened?

• European paradox: What changed in the late 1990s?
• Single market –> political economy, competition policy
• Strong & independent regulators
• American paradox: What changed in the 2000s?
• More corporate lobbying, less antitrust
• Barriers to entry
• Excessive regulations &licensing
• Predatory behavior (tech, health)

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Lobbying Expenditures

1 1.5 2 2.5 3 3.5 Total Lobbying Expenditures ($ BN USD) 2000 2005 2010 2015 Year US − Total US − Business EU − Total EU − Business

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Conclusion

The End

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EU Paradox

2 4 6 8 Dominance Restrictive Trade Merger DG Comp EU NCA North America

Source: Hylton and Deng (2006)

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EU vs. US: Gross Profit Margin

.17 .18 .19 .2 .21 .22 GOS/PROD 1990 1995 2000 2005 2010 2015 US EU (raw) EU (US weights) Source: OECD STAN. Non-Agriculture Business sector excluding RE. EU series based on weighted average across those EU-28 countries for which data is available in STAN.

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Political Contributions and Antitrust Enforcement

“I believe that application of anti-trust against Google would be a woefully misguided step that would threaten the very integrity of our anti-trust system, and could ultimately lead to Congressional action resulting in a reduction in the ability

• f the FTC to enforce critical anti-trust protections”

– Jared Polis, Democratic Congressman One of at least 13 U.S. congressman who sent letters to FTC regarding the FTC’s investigation of Google

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Merger Enforcement: US

Source: Kwoka (2017)

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Barriers to Entry?

1000 2000 3000 4000 5000

Median # of Restrictions (NAICS−4)

8 10 12 14 16

Firm Entry Rate

1975 1985 1995 2005 2015

Entry rate Restrictions

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The Failure of Free Entry

−.5 .5 1 1.5 Elasticity of dLogN(t,t+2) w.r.t. Q(t) 1975 1985 1995 2005 CPSTAT (Firm) QCEW (Estab) SUSB (Firm)

All

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Fading Stars

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Investment is Low Relative to Q

.5 1 1.5 2 Tobin Q .01 .02 .03 .04 .05 .06 Net Investment Rate 1985 1990 1995 2000 2005 2010 2015 2020 time Net Investment Rate Tobin Q

Gutiérrez and Philippon (2017) and Lee et al. (2016).

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Missing Investment from Concentrating Industries

−.15 −.1 −.05 .05 1990 2000 2010 2020 year Top 10 dlog(CR8) Bottom 10 dlog(CR8)

. .

Wtd Average Cumulative K gap

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EU vs. US: Concentration

Source: simple average of CR8 from Bajgar et al. (2019)

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References I

Bajgar, M., G. Berlingieri, S. Calligaris, C. Criscuolo, and

• J. Timmis (2019). Industry concentration in europe and north
• america. Technical report, OECD.

Duval, R., D. Furceri, B. Hu, J. T. Jalles, and H. Nguyen (2018). A narrative database of major labor and product market reforms in advanced economies. IMF Working Paper. Gutiérrez, G. and T. Philippon (2017). Investment-less growth: An empirical investigation. Brookings Papers on Economic Activity Fall. Hylton, K. N. and F. Deng (2006). Antitrust around the world: An empirical analysis of the scope of competition laws and their effects. Antitrust Law Journal. Kwoka, J. E. (2017). U.s. antitrust and competition policy amid the new merger wave. Washington Center for Equitable Growth: Working Paper Series.

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References II

Lee, D. W., H.-H. Shin, and R. M. Stulz (2016, September). Why does capital no longer flow more to the industries with the best growth opportunities? Fisher College of Business Working Paper 2016(15).