The rise in market concentration may be a longer term challenge for the global economy, given that some of the drivers of these trends involve structural transformations. In particular, the green transformation and the rising importance of ESG may favour the larger companies that are more in a position to stomach the higher costs associated with such changes, writes Valdai Club Programme Director Yaroslav Lissovolik.
The rise in economic inequality has widely been termed in the past several years as the key factors contributing to the vulnerabilities of the global economy. But while most of the attention with respect to inequality has centered on the rising income differentials of households, there is also an important sectoral and corporate dimension with regard to the uneven and unbalanced development of the global economy. In particular, one of the implications of the pandemic in 2020 has been a marked rise in the level of market concentration across multiple sectors of the global economy. The trend of rising market concentration may pose longer term risks of lower competitive impulses and higher inflationary pressures.
Recent IMF research points to a rise in the key indicators of market power — such as the concentration of revenues among the biggest players in a sector. The pandemic appears to have exacerbated these trends — the Fund estimates
that “this concentration could now increase in advanced economies by at least as much as it did in the fifteen years to end of 2015. Even in those industries that benefited from the crisis, such as the digital sector, dominant players are among the biggest winners”.
At the same time, the IMF notes that the increase in market power has been a long-term trend spanning decades — in particular, “global price markups have risen by more than 30 percent, on average, across listed firms in advanced economies since 1980. And in the past 20 years, markup increases in the digital sector have been twice as steep
as economy-wide increases
Even more important is the fact that the rising market power of the leading firms is becoming entrenched. Across different sectors, the IMF estimates that corporates with the highest markups have an almost 85 percent chance of remaining a high-markup firm the following year, which is 10 percentage points higher than during the “New Economy” era of the 1990s
. The rise of the digital platforms is accentuating the rising concentration trend on the back of the network effects, economies of scale and more recently the effects of the pandemic.
Another research project focusing on the market concentration trends in Europe finds that “corporate market power has risen in recent decades, and recent estimates suggest that the likely wave of small and medium-sized enterprise bankruptcies from the ongoing pandemic will further strengthen market concentration
”. The study reveals increasing market concentration in Europe, but also finds positive and significant correlation between higher sector-level concentration levels and improvements in sector-level productivity. Contrary to the IMF study that calls for stricter anti-trust measures to counter the effects of rising market power, the study concludes that “Increasing market concentration in Europe should not necessarily be seen as a cause for concern related to a weaker competitive environment