The rise of corporate market power is receiving increasing attention in research and public discourse—with good reason. Increased interest in market power is motivated by some mega trends or puzzles. The “productivity puzzle”: productivity growth has slowed even as new technologies, led by the digital revolution, have boomed. The “investment puzzle”: investment has slowed even as the cost of borrowing has been low and corporate profits high.
Sluggish productivity has contributed to slower economic growth. Income and wealth inequalities have risen, sharply in some countries. Income has shifted from labour to capital, and the distribution of both labour and capital income has become more unequal. Wealth has soared, even though investment in productive capital has slowed. These trends have stoked social discontent and political tumult.
What explains these puzzles and trends?
One factor identified in recent research and publicly debated as having contributed importantly to these outcomes is a shift toward more monopolistic structures with rising market power, declining competition, and increasing economic rents.
The IMF WEO finding that the rise of market power may largely reflect faster technology-enabled productivity growth in the dominant firms rather than weakening competition in markets seems to deepen the productivity puzzle. Such relatively benign dynamics—booming technology, strong competition in markets, and higher productivity firms gaining market share—if indeed true, make slowing aggregate productivity growth still harder to explain. Yes, the global financial crisis and its aftermath had a negative impact on productivity, but the trend of slower productivity growth predates the crisis and persists, pointing to deeper, structural causes, including a decline in competition in markets.
Similarly, the productivity puzzle is deepened by what the chapter says about intangible capital: that higher mark-ups may not necessarily reflect increased market power as they may be overstated because they do not fully net out the difficult-to-measure costs of intangible capital—such as software, R&D, and intellectual property—that are rising and are higher in successful, dominant firms that are more intensive users of intangible capital. This would mean that actual productivity growth may be even lower than currently estimated because the capital input is underestimated.
On the policy front, there is a need to do more to spur and maintain competition, regardless of whether the dominant force behind rising market power is monopoly or technology. In practice, both elements would be present in varying degrees in different country/sector contexts. If competition has weakened, it should be addressed through regulatory reform, stronger antitrust enforcement, etc. But even if rising market power mainly reflects firms gaining dominant market share through early and successful exploitation of new technologies rather than competition failures, there are implications for policy.
Beyond the conventional regulatory and antitrust policies, the digital economy is raising new challenges for competition policy, including how to regulate proprietary agglomeration of data, as in digital platforms, that is now an increasingly important source of competitive advantage; how to reform patent regimes to better balance incumbent interests and wider diffusion of innovation; and how to address market concentration resulting from tech giants that resemble natural or quasi-natural monopolies given scale economies and network effects. Such challenges will only grow as artificial intelligence drives the digital revolution further.
Policies will need to be more responsive to change. There has been more action on this new agenda for the digital age in Europe than in the U.S., an example being the General Data Protection Regulation recently introduced in Europe.
The new technologies hold tremendous potential for boosting productivity, economic growth, and human welfare. How effectively and inclusively the potential benefits are realized will depend in no small part on maintenance of an open, competitive environment. (