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Sunday, April 17, 2016

Are We All Rent-Seeking Investors?

From ProMarket:

Are We All Rent-Seeking Investors?, by Guy Rolnik: ...there is mounting evidence that the all-time high of the profits and margins of many sectors in the economy is not representing a healthy economy but rather the growing market power of many companies and their ability to raise prices.
Grullon, Larkin, and Michaely (2015) studied all the public firms traded on major exchanges in the United States between 1972 and 2014 and found that more than 90 percent of US industries have experienced an increase in concentration levels over the last two decades. They also found that firms in industries with the largest increase in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, suggesting that market power is becoming an important source of value. ... Overall they assert that the nature of US product markets has undergone a structural shift that has weakened competition. ...
...the first sets of questions should revolve around the idea that the bigger and more concentrated many companies and industries become, the more they will be able to entrench themselves, to build “moats” to insulate them from competition, to capture regulation, and to get favorable treatment from government or sometimes outright large public sector contracts.
If companies operating in the marketplace can influence prices and regulation, the theorem of profit maximization as a path to welfare maximizations falls flat. ...
The growing concentration of many industries in the United States raises many questions regarding US antitrust policy and the growing role of money in politics. Grullon, Larkin, and Michaely trace the growing concentration to lax antitrust policy. ...
In spite of the growing chatter on concentration, market prices, and political influence, it seems that these claims need more empirical studies before we can conclude ... that for S&P 500 firms these exceptional profits derived from undue market power are currently running at about $300 billion a year, equivalent to a third of taxed operating profits, or 1.7 percent of GDP.
Still, the growing anecdotal evidence from many industries and the persistence of high profits margins in the face of stagnant growth and growing inequality deserves serious consideration. One question may even loom larger: given that more and more Americans’ pensions and long-term savings today are invested in the stock market in defined contribution schemes, have we created a pension model that is based on growing sharer of investments in rent-seeking activities? Put another way, are we facing an economic model in which tens of millions of Americans’ pensions are relying on the ability of companies to extract rents from consumers and taxpayers? ...

    Posted by on Sunday, April 17, 2016 at 08:49 AM in Economics, Market Failure | Permalink  Comments (64)


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