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

References The Great Reversal Thomas Philippon NYU, NBER, CEPR Chicago, March 2020

References Cost of Internet Access, 2018 Rank Country Broadband Cost 40 France $ 31 43 South Korea $ 32 53 Germany $ 37 ... 119 US $ 68

References Concentration and Markup: Telecom Panel A: Telecom .3 .5 .2 .4 .3 .1 Mark−up CR8 .2 0 .1 −.1 0 −.2 1990 2000 2010 year Mark−up CR8

References US: After-Tax Net Profit Margins Panel B. Profits/VA .12 .1 .08 .06 .04 1970q1 1980q1 1990q1 2000q1 2010q1 2020q1 Source: FRED Non Financial Corporates.

References The Rise in US Concentration Panel A. Cumulative Change in CR8 (%) 8 6 4 2 0 1980 1990 2000 2010 Manufacturing Non−Manufacturing Source: U.S. Economic Census for all Businesses. Dashed lines because of changes in industry classification from SIC to NAICS.

References 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

References Walmart .08 .6 .07 .4 Market Share Profit Margin .06 .2 .05 .04 0 1970 1980 1990 2000 2010 2020 year Profit Margin Market Share

References Good Concentration / Bad Concentration Average scores for PC1 and PC2 .6 .4 .2 0 −.2 −.4 1995 2000 2005 2010 2015 year PC1: "Intangibles" PC2: "Barriers to Entry"

References Technology or Policy What about Europe?

References PMR Reforms in EU 1.5 1 Average # of Reforms .5 0 −.5 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Duval et al. (2018).

References Comparison of Telecom Prices in FR vs US Relative Price of Communication in France 1.2 1.1 Relative price 1 .9 .8 .7 2004 2006 2008 2010 2012 2014 year

References Regulation: US vs EU POL 3 GRC 2.5 GRC POL GRC POL 2 GRC POL 1.5 1 1995 2000 2005 2010 2015 Year EU US Source: OECD PMR.

References Markups EU vs US

References 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

References 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)

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

References Conclusion The End

References EU Paradox 8 6 4 2 0 Dominance Restrictive Trade Merger DG Comp EU NCA North America Source: Hylton and Deng (2006)

References EU vs. US: Gross Profit Margin .22 .21 GOS/PROD .2 .19 .18 .17 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.

References 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 of 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

References Merger Enforcement: US Source: Kwoka (2017)

References Firm Entry Rate 8 10 12 14 16 1975 1985 Barriers to Entry? Entry rate 1995 Restrictions 2005 2015 1000 2000 3000 4000 5000 Median # of Restrictions (NAICS−4)

References The Failure of Free Entry All 1.5 Elasticity of dLogN(t,t+2) w.r.t. Q(t) 1 .5 0 −.5 1975 1985 1995 2005 CPSTAT (Firm) QCEW (Estab) SUSB (Firm)

References Fading Stars

References Investment is Low Relative to Q .06 2 .05 1.5 Net Investment Rate .04 Tobin Q .03 1 .02 .5 .01 0 0 1985 1990 1995 2000 2005 2010 2015 2020 time Net Investment Rate Tobin Q Gutiérrez and Philippon (2017) and Lee et al. (2016).

References Missing Investment from Concentrating Industries Wtd Average Cumulative K gap .05 0 −.05 −.1 −.15 1990 2000 2010 2020 year Top 10 dlog(CR8) Bottom 10 dlog(CR8) . .

References EU vs. US: Concentration Source: simple average of CR8 from Bajgar et al. (2019)

References 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 .

References 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).