Presentation to the Congressional Antitrust Caucus, Panel Remarks
February 16, 2018
Today, economists and average Americans are confused by the same puzzle: We see historically high corporate profits and low corporate investment. In a productive economy, high profits and low investment aren’t supposed to occur simultaneously. So how do we explain what is going on?
If you have high profits and aren’t investing, it’s because you don’t need to invest to maintain your competitive edge—you are making your profits in ways that aren’t competitive. You don’t need to compete on the merits of better technology, lower prices, or better goods. You don’t need to offer higher salaries or benefits to attract more productive workers. You can lowball your suppliers and squeeze their profit margins. You can provide less and get more with consumers, workers, suppliers. In short—you are ripping people off.
Indeed, profits seem to bear less and less relation to cost these days. Recent research shows that where firm-level profits were an average 18 percent higher than marginal costs in the 1980s, today they are 67 percent higher. The classic example of this kind of uncompetitive edge is a monopoly firm that can price gouge customers and rack up high profits. And researchers find consolidation of market share to be correlated with this rise in markups. More broadly, these abnormally high profits indicate some kind of predatory business model, price discrimination, controlling methods or means of distribution, control of credit, and other unfair market practices.
Anti-competitive or predatory business models can have broad negative impacts on the population—and in many examples, disproportionate effects on women and people of color. But importantly, there are numerous examples where the racial or gender effects aren’t accidental byproducts of an overall anti-competitive business model. Targeting women or communities of color IS the business model.
But none of this is inevitable. Rather, it is the result of lax antitrust enforcement. Policymakers can curb these predatory models by breaking up firms, better regulating markets, or providing public options.
So, what are these predatory business models?
At the most basic level, concentrated firms can engage in regular old price gouging—producing less but charging more, and thus reducing access for some range of consumers. For communities of color, this can be a particularly pernicious problem, as monopoly effects interact with our history of neighborhood segregation to reduce business investment in critical services—like groceries or broadband. The problem of food deserts and the digital divide can both be considered problems of antitrust.
As stated, monopolies want to earn exorbitant profit, not just some profit. For a monopolist, it might not be worth it to operate in a community where you can’t get the population to pay your marked-up prices. The concentration of the grocery industry, for example, is correlated with less investment, or the shuttering of stores in communities of color, which due to historical redlining are concentrated and disproportionately low income. This isn’t simply an income effect. In fact, middle- and high-income black and Latino families live in lower-income communities than their white counterparts and therefore have less access to basic services than their white counterparts.
- In 1992, the top 4 largest grocers by market share controlled 16.8 percent of the industry, and the top 20 controlled 39.2 percent. By 2016, the top 4 grocers served 42.4 percent of the market, and the top 20 served 66.6 percent.
- Grocers have drastically reduced their competition and been a disaster for community-based stores. Between 2005 and 2015, the number of independent grocers declined in 41 percent of counties.
- Unsurprisingly, access has suffered. According to the USDA, between 2010 and 2015, low-income areas with limited supermarket access increased by 5 percent.
- Again, this is not because profits can’t be made in lower-income communities, but rather that not enough profits can be made. Firms aren’t looking to break even—but to boost shareholder profits.
- Breaking up grocery consolidation won’t end the gap in access to food, but it would help.
We see a similar pattern in broadband access.
- Census Bureau data shows black and Latino households have access to lower speed wireless connections than the majority of white households—if they have internet access at all.
- Telecoms don’t invest the same way in communities of color.
- It’s important to note, this is not because these communities are not profitable.
- Cooperative and municipal ISPs have found that it is possible to break even or make modest profits. It’s just that they aren’t profitable ENOUGH for monopolists.
- While a public utility model might not close the digital divide, it would certainly reduce it sharply.
Another clear anti-competitive behavior is price-discrimination. With sufficient market power, firms can segment markets and overcharge specific communities.
- For example, before the ACA, insurance companies routinely charged women 50 percent more for health insurance than men. This was not a secret. The ACA made “gender rating” illegal.
- The subprime loan crisis was driven by price discrimination. Mortgage lenders segmented populations, charging different prices or providing different products to communities of color.
- We now know that lenders specifically targeted segregated neighborhoods—where good and fair financial services were historically less available—to sell a bad product.
- There was a 14-percentage-point difference in the share of subprime loans between majority minority neighborhoods and white neighborhoods. In more highly segregated neighborhoods, that rose to a 22-percentage-point difference.
- Controlling for credit and other risk factors, black and Latino homeowners were more likely to get subprime loans.
- In a competitive market, all people would have access to the same kinds of loans. If a person of color received a high-ball estimate for a home mortgage, he or she could just go across the street to the competition.
- Price discrimination in credit is hardly yesterday’s story. Just today, there was a New York Times piece about discrimination in housing finance. Meanwhile, the CFPB, which was designed specifically counter the market power of discriminatory lenders and to protect consumers, is under attack.
- We have laws that prohibit price discrimination, but current regulatory policing is clearly insufficient. The policy path forward would be reducing consolidation in the finance sector, perhaps encouraging the creation of more black- or Latino-owned banks. Or policymakers could provide a public option for housing finance and checking services.
Regulatory arbitrage provides a third path to market domination through anti-competitive tactics. Today, the explosion of peer-to-peer services, such as Uber or Airbnb, find a key advantage in circumventing market regulations designed to ensure fair exchange—particularly anti-discrimination legislation.
- User ratings, which embed the population’s prejudice in their model, drive exchange with consequences for both consumers and workers—as opposed to employment supervision, to which the Civil Rights Act applies.
- Airbnb is a hotel that doesn’t have to abide by the Civil Rights Act. Uber often pitches itself as an alternative to the notoriously discriminatory taxi industry. The app may be less discriminatory or it may not be. Regardless, it has no legal obligation to provide equal service or equal employment to all people, and there is no legal recourse if Uber fails on these standards.
- Beyond ratings, algorithms, which increasingly drive consumer and employee access, work as a kind of black box that may or may not drive exclusionary practices. We do know that AI and algorithms bake in assumptions about behavior, and that these programs often embed stereotypes into technology, such as facial recognition software that misidentifies people of color and algorithms that racialize search results for people or businesses.
- As they dictate access to the market, we have to consider the public ramifications of these technologies.
Consequences for Democracy:
The business practices described above primarily benefit firm shareholders who see stock
prices rise and dividends increase thanks to increased profits. But we know that the top 20
percent of income earners own 93 percent of the market, and only about 50 percent of
Americans own any stock at all. A small share of the population is gaining while broad swaths of
consumers are losing.
- From a political perspective, this is puzzling. How can these disparities persist?
- Economic theory suggests that when firms are able to achieve outsized profits—or rents—they start shifting resources into preserving these efforts.
- In short, the winners increasingly translate economic power into political power.
- Forthcoming research shows initial links between increased campaign contributions and post-fact consolidation in both states and at the federal level.
- In addition to securing policy by influencing legislators and regulators, we see massive efforts to in fact disenfranchise voters—particularly voters of color. The rise of new voter ID laws, the success of gerrymandering, and the funding targeted to toward these campaigns are worth considering in the context of securing rent-seeking profits.
Antitrust and competition policy are topics that are certainly relevant to all workers, all consumers, and all small business owners. But there are also specific aspects of unbridled market power that interact with structural discrimination to incentivize profit seeking from the unfair targeting or exploitation of women or people of color. These kinds of predatory practices must be taken into account when identifying policy solutions to the challenge of market power and associated conduct, whether the solution is breaking up firms, better regulating markets, or providing public options to serve all populations.