Thread by @Noahpinion

I'm now at a panel called "What should IO say about competition in the United States economy?".

This is an interesting question. It's kind of like "what should meteorology say about the weather?".

First speaker is Jason Furman - not an IO guy!

Excellent.

Furman: Productivity has slowed and inequality has risen.

Why?

Furman: Slowing productivity growth is partly because of slower TFP growth and less business investment.

But the return on capital has gone up a bit. And for top companies the return on capital has absolutely soared!

Why is there so little investment?

Furman: We're seeing a combination of:
Less investment
Higher returns for top companies
Reduced firm entry
Greater industrial concentration
Capital share of income has increased
Labor income inequality between firms has gone way up

Basically a few huge companies are getting all the money and fewer new companies are starting up.

Many people from outside IO have documented - and worried about - the rise in concentration.

Furman: What's happening?
Organic growth by efficient firms and exit by inefficient ones?
Global competition?
Increasing returns to scale and network externalities?
Reduced antitrust enforcement?
Increased barriers to entry from regulation?

The retail sector looks a lot like a "superstar" situation: Walmart was very efficient and drove less efficient stores out of business.

Health care doesn't look like that at all.

There's also direct evidence for weaker antitrust enforcement.

Furman also thinks land use restrictions, occupational licensing, and regulatory barriers to entry are part of the story too.

A number of models find that the problem is too little competition, and that the effect on productivity growth is large.

Next speaker is Steve Berry, an IO economist.

He says IO economists initially reacted smugly to the macro people, saying "well everything's endogenous" and basically ignoring it.

But then labor economists agreed with macro people...

Berry: Have IO economists missed the forest fire for the trees?

Berry intends to remind us of why IO economists decided that industrial concentration didn't matter.

The "Chicago school" observation was that markups and concentration could go up because efficient companies were growing at the expense of inefficient ones.

In response to this, IO people developed an empirical approach that used lots of theory and looked only at specific markets, but which could say little about economy-wide-trends.

Berry: There is no theory that says that market concentration has a causal effect on anything.

(I'm pretty sure that's not right...)

Berry calls research that forgets that concentration is an outcome, not just a cause, of economic phenomena "zombie IO".

But then, he asks, where else could all the trends that Furman showed coming from?

Berry's entire talk (which I had read in ppt form previously) is about telling people not to interpret correlations between markups or concentration and bad economic outcomes as causal.

Berry: One thing IO can do is look at larger sectors, like the entire wholesale sector.

(Weirdly, the wholesale sector is growing and becoming concentrated, not dying.)

For those who have followed the thread this far, here is a picture of a rabbit who looks like a bison.

Berry: The wholesale sector appears to have increased fixed costs.

Maybe information technology is increasing fixed costs, he says.

Berry: Even if increased fixed costs are caused by technology, allowing big mergers could be very bad for the market.

We need more IO theory about how competition works in these sectors.

Berry: people thinking about IO need to learn more of the IO theory that has been developed over the last 40 years.

(really??)

Berry is basically calling for IO people to respond to the macro people's challenge by basically taking over from the macro people and applying a mix of new and old tools from the IO field to attack the questions the macro people have raised.

Berry's talk feels like a direct response to Furman's but in fact they used different terminology for the same things and largely talked past each other. It turns out I've read both of these talks before, actually. They were presented earlier at different conferences.

Isn't this guy adorable?

Next up is Andrew Sweeting, asking whether we should change how we regulate mergers.

He notes that many "merger retrospective" studies found that prices rose after mergers (usually after consultants claimed prices wouldn't rise!!).

Why aren't rising prices from mergers causing industry-level prices to rise?

(He notes that the Miller-Coors merger temporarily reversed a long-term trend of falling beer prices.)

Sweeting: Antitrust policy is about preserving competition, not preventing concentration.

(This is a variation of the same old "Chicago" argument that concentration is good because some companies are just really efficient.)

Sweeting: How could we tighten merger policy?

(To me this seems straightforward; just say no to a bunch of large mergers and see what happens!)

Sweeting: When the FTC actually goes to court it tends to win. So maybe it's not going to court enough?

Sweeting: "efficiency" arguments are too readily accepted in merger cases. A student's paper found, for example, that mergers did result in TFP but that the efficiency wasn't passed through to consumers.

Sweeting also mentions the idea of a "kill zone" where big companies kill new startups.

I don't think any of the speakers so far has said the word "wages". The idea that wages should be a key consideration for antitrust policy seems to be taboo in IO.

Sweeting mentions that tacit collusion could be an important factor in concentrated industries.

Hmm, you don't say?

Last speaker is Nancy Rose.

We under-enforce mergers and IO economists need to urge stronger enforcement, BUT IO economists also need to smack down shaky evidence.

Rose: Antitrust budgets haven't risen. Enforcement actions haven't risen. But mergers have risen a LOT.

That should be alarming.

Look at this chubby good boy

Rose is basically showing a ton of evidence that antitrust enforcement has gotten more lax in recent decades.

Rose also points out that the rules of antitrust enforcement make it really really hard to fight a merger. Also, judges don't understand economics, so enforcement is pretty random.

Rose says the IO community bears some responsibility for lax enforcement.

She notes that the "Chicago school" practice of treating "theory as fact" reigns supreme in the judiciary, because the Chicago school people managed to train a ton of judges.

Rose: First, IO people need to reevaluate their priors on mergers.

IO people have asserted to her without evidence that most mergers enhance efficiency. That sort of ground-level conviction needs to change.

Rose: IO people need to think about harms other than high consumer prices!

Reduced innovation

Easier collusion

Increased entry barriers

Monopsony power (finally!!)

Rose: IO people need to give more input to the legal system (against mergers).

And that's a wrap! Thanks for staying til the end of the thread!