Market concentration has been linked to adverse consumer outcomes in many specific instances; firms with monopoly power can and do exploit their position through higher prices (DOJ 2008; Kwoka, Greenfield, and Gu 2015). Indeed, firms’ markups—one indicator of firms’ pricing power—have likely been rising (De Loecker and Eeckhout 2017). The broad-based increase in concentration, described in fact 1, has therefore prompted questions about broader economic impacts that increasing monopoly power might be causing.
One focus of these questions is the long-run deterioration in U.S. business investment. Figure 5 shows a three-year moving average of net investment divided by net operating surplus from 1963 to 2014. After a strong surge in the 1990s, net investment has fallen to less than half of its 1970s level.
Work by Gutiérrez and Philippon (2017a) suggests that rising concentration is indeed related to the deterioration in investment: after adjusting for firms’ expected profitability and considering a number of alternative explanations, increased concentration emerges as a key driver of falling investment after 2000. Consistent with the research described in fact 4, Gutiérrez and Philippon also find that industries with a larger proportion of passive investment are characterized by diminished investment (though this could be for a variety of reasons).
An alternative explanation for the decline in measured investment—poorly measured intangible investment—also plays a role (Alexander and Eberly 2016). As the name suggests, intangible capital consists of valuable business assets like brand equity, business methods, and technical discoveries, rather than better-measured assets like plants, equipment, and land. Measured investment declines were larger in industries for which intangible capital is more important; Gutiérrez and Philippon (2017a) find that increasing intangible investment can explain as much as a third of the shortfall in measured investment.