By Tommaso Valletti (ProMarket)
Research on market power, its causes, and its consequences has received a welcome revival in the past few years. A group of excellent scholars has managed to make progress on rather hot competition policy topics. What’s more, this research was accepted for publication in journals considered to be at the very top of the profession.
Among these, I have selected three that have made a real impact. The work of De Loecker et. al (2020, Quarterly Journal of Economics) provides evidence of a historical increase in markups (that is, the ability of firms to sustain prices above their variable costs; see Figure 1 which shows in particular that this rise has been quite dramatic starting from the 80s) as well as in firms’ profit rates.
Azar et al. (2018, Journal of Finance) study the role of large asset management firms, such as BlackRock or Vanguard. They show that, in the airline industry, competing airlines are actually jointly held by a small set of such common owners (see Figure 2, where a standard measure of concentration—the Herfindhal Hirshman Index, or HHI—is modified into an index called MHHI that accounts for such linkages). They also show that, when common ownership within specific airline routes goes up, ticket prices also increase along those routes. Hence, airline travelers seem to lose from the presence of common owners…