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Threat to economic recovery? From The market power is increasing

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In this epidemic crisis, small and medium-sized enterprises have been particularly hard hit, resulting in large-scale unemployment and other long-term economic trauma. One of the less noticeable but still serious problems is that the market dominance of the dominant companies is rising. When the strength of these companies becomes stronger, the smaller competitors are declining.

From the relevant experience and the research of the International Monetary Fund (IMF), we know that a few companies with too strong market power may drag down medium-term economic growth, stifle innovation and inhibit investment. This result may seriously affect the recovery of the economy from COVID-19 and will hinder the rise of many emerging enterprises, and its vitality is urgently needed in the world today.

At present, it is more important than ever to create a more level playing field. The government needs to achieve this goal in a wide range of departments, from brewing to hospitals to digital departments.

The latest IMF research shows that the key indicators of market power are rising – for example, the price increase compared with marginal cost, or the income concentration of the four largest enterprises in a sector. Affected by the epidemic, we estimate that the current increase in market concentration in developed economies is at least equivalent to the increase in the 15 years from 2000 to 2015. Even in sectors that have benefited from the crisis, such as the digital sector, market dominant companies are among the biggest winners.

Will decades of trends worsen?

The outbreak of the epidemic has led to the enhancement of market dominance of many industries, which will intensify the trend that has lasted for 40 years. For example, since 1980, the global price increase of Listed Companies in developed economies has averaged more than 30%. In the past 20 years, the profit growth of the digital industry has been twice that of the whole economy.

Of course, looking back on history, rich profits have always been the natural return of successful enterprises. They have replaced the existing enterprises through innovation, efficiency and service improvement. Think about how IKEA has changed the way people buy furniture, or how Apple has changed the mobile phone market.

But recently, there are more and more signs in many industries that the market dominance of leading enterprises is becoming more and more deeply rooted in the absence of strong competitors. In different sectors, we estimate that the company with the highest price increase in a particular year (top 10) is nearly 85% likely to continue to increase its price in the next year – 10 percentage points higher than that in the “new economy” period in the 1990s.

Large technology enterprises are a typical example: as the market subverters who replaced the existing enterprises 20 years ago, their market dominance is increasing, but now there are no potential subverters exerting the same competitive pressure on them. In this regard, the impact associated with the epidemic is intensifying the powerful potential forces such as network effect and economies of scale.

The role of M & A

In a number of industries, we have observed a declining trend in business vitality. Imagine that a start-up manufacturing enterprise can’t break through from the local market, or a new retail enterprise is faced with a large competitor operating at a loss at a lower price to try to shut out the new enterprise.

In terms of economic growth, employment creation and income increase, these are all missed opportunities. Our research shows how some enterprises control the bargaining power of wages in the labor market. They pay less than their employees’ marginal productivity.

One of the factors contributing to these trends is the increase in M & A activities, especially those initiated by leading enterprises. Although M & A can save costs and optimize products, it can also weaken innovation motivation and enhance the ability of enterprises to raise prices. Worryingly, our analysis shows that M & A activities of leading enterprises will lead to the decline of business vitality of the whole industry, because the growth and R & D expenditure of all competitive enterprises will be hit. This is particularly worrying in a world of slow productivity growth.

Enlightenment to policy makers

So what can the government do? We would like to emphasize five key actions, whose importance varies from jurisdiction to jurisdiction.

First of all, the competition authorities should be vigilant when implementing merger control. The criteria for competition authorities to review transactions should cover all relevant situations, including acquisitions of small businesses that have developed potential to compete with leading companies. For example, Germany and Austria recently introduced a threshold based on transaction price on the basis of target turnover threshold. An assessment of previous merger decisions may also help to enforce competition rules more effectively.

Secondly, the competition authorities should be more active in prohibiting abuse of dominant position and make more use of market research to expose harmful behaviors before any illegal behaviors are reported. An Australian survey of the dairy industry in 2018 illustrates the benefits of this approach: it enforces improved contracting practices between farmers and processing companies.

Third, countries need to do more to ensure normal competition in the market (including labor market competition). In this regard, it is welcome to vigorously implement competition rules to prevent enterprises from signing “no poaching” agreements. The non competitive terms in some retail and fast food employment contracts also make it more difficult for employees to change high paid jobs, especially for low skilled workers.

Fourth, the rise of big data and artificial intelligence is significantly expanding the advantages of existing enterprises, and the competent competition authorities should be able to keep up with the pace of the digital era. Improving data portability and system interoperability can make it easier for new enterprises to compete with existing enterprises. As for the precedent of government regulation on how to ensure that consumers have the right to change service providers and improve their well-being, it is worth considering that the European Union gave consumers the right to retain their mobile phone numbers when changing operators 20 years ago, thus promoting competition.

Finally, resources are very important. In the United States, for example, the total budget of the Federal Trade Commission and the antimonopoly division of the Department of justice accounts for about half of the GDP of 40 years ago. In many jurisdictions, with the rapid development of technology, the authorities may need to invest to further upgrade expertise in specific areas. The UK recently announced that it will set up a new digital market working group to manage the behavior of leading platforms such as Google and Facebook.

A good omen for the future

The good news is that major economies, including the European Union and the United States, have begun to actively review their competition policy frameworks. These reviews provide an opportunity not to be missed. Policy makers should take immediate action to prevent further sharp rise in market power from hindering economic recovery.

This crisis will reshape our economy through profound structural adjustment, which will spawn a number of start-ups with high growth, innovation and high-quality jobs. They should enjoy a level playing field and a chance of success.

It is also important to provide broader targeted policy support for SMEs, as government programs designed to help businesses obtain financing during the epidemic do not benefit many small businesses. With the steady economic recovery and the gradual withdrawal of policy support, the more urgent task is to ensure that the sustainable operation of small and medium-sized enterprises can obtain financing, and the relative disadvantages of large enterprises will not further expand.

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