Explaining the Rising Concentration of U.S. Industries: Superstars, Intangibles, Globalization or Barriers to Entry?

We study the evolution of profits, investment and market shares in US industries over the past 40 years. Globalization explains a large share of the evolution of the manufacturing sector. Foreign competition leads to domestic consolidation and increasing intangible investment. Outside manufacturing we show that two theories account for most of the changes. During the 1990’s, and at low levels of initial concentration, we find evidence of efficient concentration driven by tougher price competition, intangible investment, and increasing productivity of leaders. After 2000, however, the evidence suggests inefficient concentration and barriers to entry, as leaders become more entrenched and concentration is associated with lower investment, higher prices and lower productivity growth. We construct statistical proxies to predict if the evolution of an industry is more consistent with efficient or with inefficient concentration. ∗Some of the results in this paper were first published in Gutiérrez and Philippon (2017a). We are grateful to the Smith Richardson Foundation for a research grant, and to Erik Hurst for helpful comments and suggestions. †New York University. mc5851@nyu.edu ‡New York University. ggutierr@stern.nyu.edu New York University, CEPR and NBER. tphilipp@stern.nyu.edu 1 Four stylized facts have emerged in recent years regarding the U.S. business sector, summarized in Figure 1. Concentration and Profits have increased (Panels A and B, respectively); while the labor share as well as investment relative to profits and Q have fallen (Panels C and D, respectively). This is true across most U.S. industries as shown by Grullon et al. (ming) (concentration and profits), Autor et al. (2017a) (labor shares) and Gutiérrez and Philippon (2017b) (investment). While these stylized facts are well established, their interpretation remains controversial. There is little agreement about the causes of these evolutions, and even less about their consequences. At least four prominent explanations have been put forth in the literature:1 1. Rising Capital Share (henceforth α): The evolution of profits could be explained by an increase in the capital share. This would mechanically reduce the labor share while measurement errors could lead to a decrease in (measured) investment. Capital deepening could come from the rise of intangibles as in Alexander and Eberly (2016); Crouzet and Eberly (2018) or automation as in Acemoglu and Restrepo (2017). 2. Rising Elasticity (henceforth σ): Autor et al. (2017a) argue that concentration reflects “a winner take most feature” explained by the fact that “consumers have become more sensitive to price and quality due to greater product market competition.” Economic activity shifts towards more productive, higher mark-up, and lower labor share firms. 3. Increasing Returns to Scale (henceforth γ): Network effects and increasing differences in the productivity of Information Technology could increase the returns to scale – particularly of top firms. Bessen, 2017 studies the link between IT and Concentration, while Aghion et al. (2018) develop a model where ICT improvements extend the boundary of high-productivity firms, leading to an initial burst followed by a drop in growth. 4. Rising Barriers to Competition (henceforth κ): Gutiérrez and Philippon (2018), Jones et al. (2018) and Gutiérrez and Philippon (2019) argue that domestic competition has declined in many U.S. industries because of increasing entry costs, lax antitrust enforcement, and lobbying. Despite explaining a common set of (baseline) facts, these explanations have widely different implications for welfare. According to σ, for example, concentration is good news: it leads more productive firms to expand, while product market competition increases. According to κ, concentration is bad news: it leads to an increase in economic rents and a decline in innovation. The goal of this paper is to determine which of these explanations is consistent with aggregate and sector-level trends. Let us make three comments before discussing our approach and results. First, these hypotheses are not mutually exclusive. Leaders can become more efficient and more entrenched at the same time – which can explain their growth, but also create rising barriers to entry (Crouzet and Eberly, 2018). Indeed, a combination of all these explanations is often heard in the discussion of internet giants Google, Amazon, Facebook or Apple. Second, intangibles can play a role in all of these explanations. They may lead to One could entertain other hypotheses – such as weak demand or credit constraints – but previous research has shown that they do not fit the facts. See Gutiérrez and Philippon (2017b) for detailed discussions and references. 2 Figure 1: Evolution of U.S. Concentration, Profits, Labor Shares and Investment

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