Widening Gaps

Failing paradigm

Over the last 50 years, economic policies have been dominated by a neoliberal approach, prioritizing market freedom and deregulation. This approach has often overlooked the economic and social consequences of unchecked economic power. Although the failure of the current paradigm has been showcased by different reports such as De Loecker et al (2020)(opens in new window) and Akcigit and Ates (2021)(opens in new window) focusing on the US markets, we lacked empirical data showing the same trend in the EU. The report by the European Commission clearly shows that these worrying trends exist in Europe as well.

Worrying trends

The report shows that in a wide range of sectors in the EU over the past 25 years:

• Concentration at both industry and market levels has increased.
• Markups and profits for companies controlling essential inputs have increased.
• The economy is divided between ‘Global Superstars’ (the most profitable large global companies) and the rest concerning markups, profits and productivity. The gap between them is increasing.
• Markets became static, meaning the rate of change in markets (in terms of entering markets and being able to disrupt incumbents) has declined.

As a result, the report gives a bitter pill to swallow: “The intensity of competition in the EU seems today to be weaker than in the past.”

Winner-takes-most dynamic

The report points out the evolution of markets and how new characteristics of the markets benefitted large companies (winner-takes-most dynamics). This indicates that firms that initially succeeded, managed to preserve and extend their dominance not due to their success but their ability to:

• Leveraging digitalisation and globalisation.
• Engaging in M&A activity (to a limited extent).
• Investing heavily in intangibles.

Reduced resilience

The report lists a couple of concerning consequences of increasing concentration:

• Reduced business dynamism: indicating a low rate of new firms in the market, the persistence of ranks and market shares of incumbents and a low rate of revolutionary innovation.
• Increasing productivity gap between big firms and the rest: market structures enable global companies to grow more while extracting rents from the rest.
• Higher wage inequality and a lower labour share: Rising markups and concentration correlated with lower labour share.
• Reduced resilience of the EU economy to economic shocks.

Reduced business dynamism indicates that it has become more challenging for entrants to disrupt and overthrow incumbent Global Superstars even when these entrants produce better and more sustainable products and services.

Unsurprisingly, higher markups, profits and concentration coincide with a lower labour share and a higher wage inequality. While companies were increasing their profits, workers were adversely affected by the concentration trend. Higher concentration at product markets means fewer employers available to workers, and less bargaining power for workers vis-a-vis employer companies.

Furthermore, the concentration of industries increased the vulnerability of markets to shocks. Indeed, our research report Hungry for Profits, analyses agribusiness which is controlled by only five big global companies, and shows that during and after the pandemic and Russia’s invasion of Ukraine, these companies increased their net profits tremendously while people were suffering from higher food prices.

Vigorous competition enforcement?

While the report provides important and concerning empirical data, it doesn’t offer concrete proposals for the solution. Nevertheless, we can find some hints of how vigorous competition enforcement should look like.

• Learning from effective competition authorities: The rise of concentration and markups is less pronounced in Germany, which may be linked to effective competition enforcement. The German Competition Authority Bundeskartellamt has a reputation for strong competition enforcement.
• Competition enforcement shouldn’t aim to create European Champions at the expense of effective competition. The report focuses on the effects of competition on the export capabilities of European companies. The report suggests that competition at home (at the national or EU level) is important for the export competitiveness of EU firms.
• Competition policies should take a broader look at the harmful effects of concentration. Instead of focusing on markets and consumers, public interest should play a bigger role in merger reviews.
• Competition enforcement should intensify its scrutiny of previously overlooked industries.

While the Commission’s intervention rate against Global Superstars in technology markets is 76 per cent, big companies in industries such as food, household, personal and cosmetic products enjoyed a low intervention rate of 17 per cent).

Bunge Viterra merger

The European Commission now has an interesting test case at hand: the merger between Bunge and Viterra. This is a typical example of where the EC can improve its track record and prevent a Global Superstar from securing and extending its power. The decision is expected before 1 August 2024 and will show whether the European Commission has learned from the last 25 years.