Facing the steepest and fastest price hikes across the economy in 40 years that many voters say is their No. 1 issue, the White House and other progressive groups have found a culprit: a decades-long trend toward greater concentration in the economy, which gives corporations more power to extract price hikes from consumers.
But the idea is not wholeheartedly endorsed by economists, even from those on the same side of the aisle. Two former senior Obama administration officials have been highly skeptical of the idea. Larry Summers, in his now-typical cutting style, has dismissed it, and Jason Furman has done so in more measured tones. Summers tweeted the “emerging claim that antitrust can combat inflation reflects ‘science denial’,” while Furman said, “I think 90 percent of inflation is the result of excess demand driven by fiscal and monetary policy.”
Even Nobel Prize-winning New York Times columnist Paul Krugman, who has expressed more openness to it, has cautioned, “monopolies aren’t the reason inflation shot up in 2021,” even if he conceded they could explain some of the price increases.
In a speech on inflation Monday, Federal Reserve Chairman Jerome Powell did not mention concentration or market power once.
Part of the reason why the White House is buying into the argument is that it’s gained popular support. The progressive pollster Data For Progress has found both that voters are more likely to say inflation is the “most important economic problem facing the country today” and that majorities of voters — Democrats, Republicans and independents — say that “large corporations are taking advantage of the pandemic to raise prices unfairly and increase prices” as opposed to “large corporations have no choice but to raise prices because of rising costs and wages they need to pay to workers.”
The debate is crucially important for the Biden administration — if it’s true that market concentration is egging on inflation, then it could pursue an aggressive antitrust agenda that it wanted to implement anyway while also combating its No. 1 economic liability. If it’s in fact the case that some mixture of economic distortion from covid and expansive fiscal and monetary support for the economy is the cause, then the set of solutions is far less palatable.
Why some are saying market concentration is causing price increases
Democratic Sen. Elizabeth Warren of Massachusetts put forth the argument that market concentration was prompting price increases in a hearing with Federal Reserve Chairman Jerome Powell in January. “They’re raising prices because they can, and they’re not being competed down. You know, market concentration has allowed giant corporations to hide behind claims of increased costs to fatten their profit margins,” Warren said. “So the consumer pays more both because the corporation faces higher costs and because, as you put it, because the corporation can increase prices.”
President Joe Biden underlined the point in his State of the Union address earlier this month: “When corporations don’t have to compete, their profits go up, your prices go up, and small businesses and family farmers and ranchers go under.”
Progressives and the White House have pointed to a number of industries that exhibit high degrees of concentration and accelerating costs to the consumer, like meatpacking and food or oil and gas. They’ve also sought to spotlight the dramatic profits some companies are making amid rising prices, as well as them telling their investors about their ability to aggressively raise prices. In February, for instance, Tyson Foods Chief Executive Officer Donnie King said in a call with investors that “our average sales price for the quarter increased 19.6 percent relative to the same period last year,” and “our pricing actions led to approximately $2.1 billion in sales and price/mix benefits during the quarter, which offset the higher cost of goods sold of $1.6 billion.”
Overall, the company’s profits almost tripled, while its volume of sales stayed roughly flat compared with a year ago. (Tyson has argued against claims that current high prices are due to consolidation, instead attributing them to “unprecedented market conditions … including a global pandemic and severe weather conditions.”)
Sarah Miller, the executive director of the American Economic Liberties Project, which has produced a stream of research linking market concentration to price increases, sees a threefold process at play.
There was a “merger wave” accompanying the pandemic, and while “there are real supply chain constraints and increased demand for certain types of goods … that has resulted in increased prices,” she explained to Grid. “The underlying market failures involve supply chains that have purposely been whittled down as a result of just-in-time business practices and ways to squeeze every last drop out of a slimmed-down supply chain that’s been driven by market power and this notion of efficiency of all cost versus resiliency and redundancy.”
Finally, she said, “Pricing decisions are made by people, when there is a narrative around inflation that’s permeating the public discourse, that’s an important opportunity to flex pricing power more. When you add that to a higher concentrated economy with limited completion, you have the ability to push prices well beyond what cost increases are beyond inputs and labor.”
This view has not just won the endorsement of the White House and some progressive senators, but also regulators that work on antitrust. Lina Khan, the Federal Trade Commission chairwoman and one of the most prominent voices in a new wave of concentration-conscious scholars, has announced an investigation into “whether supply chain disruptions are leading to specific bottlenecks, shortages, anticompetitive practices or contributing to rising consumer prices.”
Why some skepticism is warranted
The challenge for linking corporate concentration and the exercise of market power with inflation is that rising concentration is hardly the only thing that’s been strange or novel with the economy recently.
As many anti-monopoly activists argue, rising concentration has been a multi-decade trend, while inflation came only with the pandemic; No. 2 is that there have been very clear major changes to the economy that could account for at least some of the inflation — namely the disruption of supply chains for goods like cars — as well as demand side explanations like low interest rates and government stimulus.
“Has anything that’s happened lately vis-à-vis the inflationary things people are upset about, big fiscal [policy], supply shocks? Has any of that changed market power? Does that have any effect on how prices move around? Do I think there’s been some large and sudden increase in market power that’s accompanied what we’ve been seeing in fiscal and monetary policy over the last year? I would say no — I think that’s where a lot of economists are,” Chad Syverson, an economist at the University of Chicago, told Grid.
While the debate does not strictly fall across these lines, the dispute could be seen as one between those who look at the economy as a whole and those who look at specific markets and industries.
A macroeconomist might see an economy distorted by supply chain issues, consumers having a preference for goods over services or large amounts of monetary and fiscal stimulus. A lawyer or antitrust specialist might see a company flexing its power to raise prices more than it might if it had more competition.
“Generally macro people worry a lot more about ongoing inflation, which is driven by inflationary expectations. I don’t think to my knowledge that has been incorporated into this discussion about the effects of concentration and market power. Some of the discussion is people are talking past each other,” Martin Gaynor, former director of the Bureau of Economics at the Federal Trade Commission and professor at Carnegie Mellon University, told Grid.
“My sense is that what’s going on with inflation is a classic situation of increased demand and not an associated increase with supply. Market power can add to that, it can be a contributor. I don’t personally think market power is the primary driver of what we’re seeing, but it can contribute,” Gaynor said.
Gaynor explained that it’s possible for market power to give companies more leeway to set prices in an already inflationary environment. “You have firms with market power. There’s a demand shift and no associated increase in capacity or supply. Firms can take advantage of that. If you have a bunch of that happening, you can have price increases,” he said.
Furman said in an interview with RIA Intel, a financial industry trade publication, “Corporations always want to charge higher prices and make extra profits. The question is: Why can they do it now and not before? To understand that, one needs to think less of companies and industries and more about the overall macroeconomic situation.”
Blaming corporate profits for inflation isn’t new
It’s not new to look to problems of corporate structure and competition when trying to address inflation. Facing down years of seemingly relentless inflation, the Carter administration looked to regulatory and competition policy to help stop the growth of prices.
“Of all our weapons against inflation, competition is the most powerful. Without real competition, prices and wages go up, even when demand is going down. We must therefore work to allow more competition wherever possible so that powerful groups — government, business, labor — must think twice before abusing their economic power. We will re-double our efforts to put competition back into the American free enterprise system,” President Jimmy Carter said in an address in October 1978, when inflation was running at almost 9 percent.
Then, as in today, economists were generally skeptical that these interventions into the structure of specific industries would bring down inflation and inflation did not abate until Carter’s choice for the chairman of the Federal Reserve, Paul Volcker, wrenched the economy into a recession with dramatic interest rate increases.