Competing Narratives: Is the Growth of Giant Companies Good for the Economy?

October 3, 2018

By Amram Margalit – Leverate

Competition in the American economy is changing, but the shift isn’t about the number of new businesses coming into the market, rather about the perceived monopoly from big corporations.

A recent conference of bankers, policymakers, and academics highlights a key concern over market concentration in which larger companies appear to be cutting competition as well as reducing wages and productivity.

However, another perspective came about from the discussions: economist John Van Reenen believes that the market concentration might not be due to reduced competition but rather a change in its nature. Van Reenen cited AirBnB and Google as examples to prove his point, adding that such productive businesses are simply acquiring a larger market share.

So which is it: is the growth of larger businesses good or bad for the U.S. economy?


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Bigger Firms Buying Up Smaller Businesses

Corporate consolidation can lead to favorable outcomes, like better productivity and greater opportunities with more resources.

GenFKD.org reports that mergers and acquisitions may not be that bad. Given the efficiency of larger firms, they have the means to provide quality products at lower prices. But it could also mean mass layoffs and create unfair competition for small businesses.

Small companies lack the heft of resources that big companies have, and this capability could cause problems in the supply chain.

Take for example the tiff between Oakley sunglasses and the world’s most dominant eyewear company, Luxottica. Oakley challenged the eyewear company on pricing, and Luxottica responded by taking out the brand from its stores.

What happens to a business if it can’t get its products to its customers? Oakley’s stock price dropped, and it had to merge with Luxottica.

The proliferation of “superstar companies”, as one Bloomberg report refers to big and old businesses, is so evident that they are increasing in number to dominate the market. The effect doesn’t just create problems for small businesses, but it also limits options for consumers.

What Happens with Reduced Competition?

Fewer options for consumers could mean higher prices. When people have only a couple of options for what airline to take on certain routes for example, those airlines may ask for higher fares. As it stands, only four airlines control 80 percent of the US market. And travelers are feeling the pinch, with a 5 percent rise in domestic fares.

So the lack of competition doesn’t just affect small businesses – consumers also pay the price.

Some industries are not giving way to market concentration though. Technology and transportation are two industries that are thriving as they give way to new players. Media also has some type of immunity as new outfits like Netflix and Hulu give the competition a run for their money, and being wildly successful with its entry into the market.

How Superstar Companies Got Away with It

Merge activities occurred in the early 1900s with the creation of steel and oil monopolies. The increase in consolidation happened due to several factors, the first being deregulation. As the aviation in the 1970s and banking in the 1980s underwent deregulation, companies had more freedom to operate in whichever way they wanted. This led to wave after wave of merger activities.

The conditions of the economy also contributed to today’s rising market concentration. For a time, the Federal Reserve kept interest rates very low. In spite of the weak economy, the move of the Federal Reserve boosted stock prices. With high stock values, superstar companies had more resources to take over rivals.

Every market has to have room for all the players — big and small. Competition is healthy for America because it encourages small businesses, which can provide jobs and consumer spending, which stimulates the economy. That competition, however, has to have its balances.

About the Author:

Amram Margalit is a professional writer who has worked in a wide range of settings, including technology companies, nonprofits, and the entertainment industry. Within these positions, Amram has provided quality content and advertising services and is currently the Content Manager at Leverate.