This post at Bloomberg is extremely difficult to excerpt, consisting as it does of snippets of conversation. It is a review of the book, The Myth of Capitalism, by Jonathan Tepper and Denise Hearn. I’ll do my best. Bloomberg’s fairly tight restrictions to access may limit your ability to access the post yourself.
Jonathan Tepper
Six players is the minimum number for good competition. It may appear to be an arbitrary number, but it is not. Professor John Kwoka examined industries by number of players and concentration and found that when you get below six major players the incentives for price collusion and price increases and other expressions of market power is higher.
Let’s do a quick headcount of American business sectors. Which sectors have six or more major players? Computer retail, auto manufacturing, retail, telecommunications, insurance, hospitality, commercial banking, steel, ag? A first order approximation would be that none of them do.
Denise Hearn
Regulatory capture is largely to blame for the lack of merger scrutiny, and an intentional intellectual capture since the 1980s that had companies focus on consumer pricing as the primary concern of merger review.
This reductionism led to a narrowing of our identities to mere consumers, rather than workers, suppliers, and citizens — where the effects of outsized concentrated power also reach.
What can be done to reduce regulatory capture, the phenomenon of regulators promoting the interests of the companies they’re supposed to be regulating rather than those of the public at large? The incentives of regulators must change. The allowable tenure of regulators must be reduced and regulators’ incentives must promote an adversarial relationship between regulators and the regulated.
Jonathan Tepper
I don’t think markets tend inevitably towards concentration, but you do end up with “dictatorships†and a very suboptimal set of outcomes if you have a communist monopoly on power deciding economic questions or a private monopolist deciding market outcomes.
Hayek identified the problem of communism was “the knowledge problemâ€. Decentralization and competition produced the best outcomes because no one could have a monopoly on knowledge.
I don’t entirely agree with Mr. Tepper here. I think that when any sector is dominated by a small number of players the tendency is for every sector to follow suit. The reason for that is that big businesses prefer to do business with other big businesses. The only solution for that is eternal vigilance and a steadfast refusal to allow consolidation in any industry.
Denise Hearn
Regarding Warren’s legislation, I think it is a welcome move to challenge the perpetual merger mania. She wants to ban deals where a company has annual revenue of more than $40 billion or together the businesses generate more than $15 billion in sales.
I think, in addition to merger review, acquisitions should be addressed, particularly in the tech sector –where the giants have spent the last decade acquiring any competitive threat (over 450 companies between the big four, Apple, Alphabet, Google and Facebook).
If there were rigorous enforcement of antitrust laws, mergers of that sort wouldn’t be a problem because they would be seen as illegal exploitations of monopoly power. Given the present environment $40 billion is altogether too large. Only 80 U. S. companies are that large. Think a quarter of that size.
I’d say “read the whole thing” but that may be quite difficult. All I’ll say is that most of us would be much better off if U. S. companies actually had to compete with each other for business. There would be more better-paying jobs, there would be more innovation, and in all likelihood prices would be lower, too. Today producers are capturing the overwhelming preponderance of the economic surplus. Just as one benchmark, more new products are introduced in Japan every year than in the entire United States. Consolidation has made us lose our edge.
May I interject that the optimum number of people on a faculty committee is six. Of course, the committee chair does all the work, but there needs to be some sort of oversight, and four or five is about optimum.
That’s group dynamics. The maximum number of people who can participate in a meeting with everyone contributing is about seven.
If anyone believes regulatory capture is a serious problem and not just the natural progression of financial sclerosis in an aging country they would need to find and support leaders who are disruptive, who are not impressed by the financial titans. And when those leaders act, they should not shrink back from fear of change, and cry out for impeachment and a return to the status quo. You can’t fight monopolies from hiding places in secret.
I believe that both the companies and the regulatory agencies view regulatory capture as a feature rather than a bug. The case of the Minerals Management Service is instructive. It was notoriously corrupt–completely captured by the oil companies.
Ultimately, the agency itself was abolished, its responsibilities divided among three other agencies. I would not be a bit surprised if those agencies have the same problems as the MMS did.
My experience is limited to what I have experienced or witnessed. I have obviously done no large scale studies. (And have a <$10B revenue focus) I would note that I am inherently suspicious of academic studies done by people with an agenda. They are exceptional at rigging them. With that, my two cents:
Concentration – a focus on the gross number of competitors doesn't work. Its more complex. Competitors by product line or within reasonable geographical reach matters, as do things like cost of entry and substitutes. In my experience the price gouging and depression of innovation stops at monopoly or dualopoly. Perhaps, situationally, at 3 players. Six is absurd. I was surprised at some of the industries you cited as concentrated. Auto makers would be surprised to hear they have only 6. Pick a category – Everyman? Chevy/GM, Ford, Kia, Toyota, Honda, Hyundai, Subaru etc etc. Even in premium brands, Mercedes, BMW, Porsche, Maserati, Bentley, Ferrari, Aston Martin, Range Rover, Chevy/Corvette and on it goes. Same in steel. It used to be US, Beth, Inland, Armco, Ford/Rouge. Now its the world. Retail? Seriously? Only Amazon's dominance of on line retail. Retail is brutal, as is hospitality. Cable, on the other hand, is the poster boy for monopoly and regulatory capture. And their days are numbered. And shall we talk about the master monopolist – Warren Buffet?
Hearn
I've had to testify in front of the FTC twice on our deals. Yes, the focus is on pricing. But she loses all credibility with me when she launches into her ax grinding about suppliers and citizens. One man's supplier is another's customer. And they will gouge your eyes out if they can. Citizen's? Do citizen's put up the money? How did AOC's bloviating work out for the citizen's of NY re: Amazon?
If you want to worry about citizen's look at the global warming nuts and coal. Or how about George Soros or this character Paul Singer? Bad guys all. Not a chance regulators can do anything.
Competition is not in short supply. Just in a relative handful of megacorps, who buy politicians. You all know what I say next. You reap what you sew.
Of those only two are U. S. companies.
To the best of my knowledge there are only three U. S. car companies of any real substance (GM, Ford, Tesla). That highlights the problem of American companies–competition from heavily subsidized foreign companies.
And all brands are sold in the US. I’m not sure what your point is. This level of competition throttles price gouging, poor design, quality or reliability issues etc. Gone are the days when The Big Three or US and Bethlehem ruled US industry. The market is robust.
If there is, today, a “Myth of Capitalism,” its largely born of the Big Government crowd and a relatively few megacorps, not capitalism per se. Obama and ATT, or the Big Banks. Hillary and Goldman Sachs. Dick Durbin and ADM. Warren Buffet, Elon Musk, Paul Singer, the Amazon, Facebook crowd. And so forth.
Really glad to see you work in Soros Drew. All cult members are required to specifically rail against him. Good to see you keeping good standing.
Back on topic, this is an issue in medicine but in different ways. There was a pretty famous curve published in Health Affairs a few years ago looking at the optimal number of health insurance companies in a state. Prices were higher when you had fewer than 4 (from memory so it oculd have been 3) and more than 6. It appeared that when you had too many choices consumers couldnt shop very well AND providers had too much market power so insurance companies couldnt negotiate very well.
We also have regulatory capture issues with pharmacy, device maker, hospital CEOs popping in and out of regulatory agencies. (Lobbying also contributes.) I dont see any real easy answer here. Some of those people are pretty appropriate forregulatory boards. You dont want people ignorant of how things work tryong to make and enforce rules. We already have some of that and it is pretty awful.
In the ideal, we place people of high integrity into the regulatory agencies out of the business sector so that they dont just use them for their own benefit. In reality we attract way too many people who think using public office for their own benefit, look at POTUS, is perfectly fine. Delaying the time from when you leave office until you can go back to business probably helps, but I dont think it makes a huge difference since I think businesses will just find some other way to reward their own people.
So this is another one of those things I am very skeptical that we will even try to change. Businesses and our politicians both benefit way too much.
Steve