Inequality: A hidden cost of market power

Abstract

This paper explores the impact of competition on inequality by developing a new model to illustrate how higher profits from market power, and associated higher prices, could influence the distribution of wealth and income. We analyse data from eight OECD countries—Canada, France, Germany, Korea, Japan, Spain, the United Kingdom, and the United States. In an average country in the sample, market power increases the wealth of the richest 10 per cent by between 12 and 21 per cent for a range of reasonable assumptions about savings behaviour, while it reduces the income of the poorest 20 per cent by 11 per cent or more. The results contribute to the economic literature on the origins of inequality, suggesting that lack of competition may be one source of economic inequality.

Inequality and market concentration, when shareholding is more skewed than consumption

“…Perhaps the most similar study to ours is Ennis et al (2017), who analyze data for eight OECD countries. They posit an equation under which the impact of market power on inequality can be estimated from the average mark-up, the labour income share, average savings rates, the marginal propensity to save, and observed income and wealth shares.…”

“…Following Ennis et al (2017), we estimate the impact of market power on inequality for a given quantile group as a function of the observed share of income and corporate equity in the presence of market power, the average excess mark-up, the income share of labour, the average saving rate, and the marginal propensity to save. Where superscripts c and m index the competitive and monopolistic cases, subscript i indexes quantile groups, y denotes income share, f denotes wealth share, µ is the excess markup, ∝ is the labour share, s' is the marginal propensity to save, and ̅ is the average saving rate, the counterfactual income share of a quantile group without market power is given by the following formula:…”

“…For example, the word 'competition' is used 75 per cent less frequently since 2000 in the annual reports of US companies (The Economist, 2017). These developments have led scholars to ask whether market power may be one of the causes of growing inequality (Posner and Weyl 2015;Furman and Orszag 2015;Barkai, 2016;Ennis et al 2017).…”

“…Our analysis follows the empirical strategy of Ennis et al (2017), but with the difference that we focus on a single country (the United States). This allows us to focus on corporate equity, rather than assuming that the distribution of equity holdings mirrors the distribution of wealth (a potentially problematic assumption, given that residential property constitutes a large share of the wealth of many families).…”

Structural policies to boost productivity and inclusion in Costa Rica

“…Regulations which restrict competition can hinder efficiency gains, innovation and productivity-enhancing resource allocation and contribute to inequality by raising consumer prices and increasing the distribution of wages (Nicoletti and Scarpetta, 2003;Aghion and Griffith, 2005;Conway et al, 2006;Song et al, 2015;Denk, 2016;Ennis et al, 2017). Competition plays a key role in allowing resources to flow to their most productive uses.…”