American Markets Need More Competition, More New Businesses

Some of the crucial ingredients of broadly shared prosperity in the U.S. economy include a dynamic market where new ideas can thrive, new businesses can reshape the economic landscape, and vigorous competition allocates resources efficiently.

Our collective imagination of the U.S. economy is often one of bold entrepreneurs reshaping the world. TV shows us a Shark Tank with an unending stream of plucky new businesses, and media depictions of Silicon Valley display a rapidly changing landscape of new firms disrupting everything they encounter. Against this backdrop it can be both surprising and incongruous to hear that by many measures the dynamism of the U.S. economy is declining and concentration is growing. In fact, the overall start-up rate in the U.S. has been declining for decades. Consider these alarming statistics.

*     In 1979, between 11 percent and 18 percent of firms were new in any given industry; by 2014 only 4 percent to 9 percent were.  This decline occurred even in high-tech.

*     Firms aged 10 and younger employ a considerably smaller share of the labor force (19 percent) than they did a few decades ago (33 percent).This is due both to the declining share of new firms and their declining size relative to older firms.

*     College-educated workers are much less likely to be entrepreneurs than they previously were.

A related trend is the substantial growth in market share by our nation’s largest firms. In nearly every sector of the economy, the largest firms have more market share than they did in the late 1990s. At the same time, the most profitable firms earn far higher returns than they used to, and those returns are persistently high, undiminished by competition. These larger, more dominant firms may make it harder for start-ups to gain traction; conversely, fewer start-ups mean that there is less competition to take market share and profit opportunities from incumbents. 

In a Hamilton Project report released today, we examine the trends of declining dynamism and growing market share, and how they fit together in a larger picture of weakening competition. Our analysis affirms the idea that declining competition seems to be linked to a more disturbing pattern of slower productivity and wage growth. With fewer workers moving from low-productivity firms to high-productivity firms, our economy loses a crucial engine of wage and productivity growth. Research also suggests that investment is lower in more concentrated industries, and there has not been an offsetting surge of investment and productivity growth at large firms.

It is important to note that the lack of competition—and increasing market concentration—is not just a problem in product markets. Many local labor markets are dominated by a few big employers, and that can weaken competition for workers and lower their wages. Even when there are numerous employers, the difficulty of finding new jobs can vest firms with substantial wage-setting power.

Some of the increased concentration may be a result of natural economic forces—returns to scale and network effects—but some of it is the result of policy. Thus, policy – from modernized antitrust to support for start-up ecosystems could enhance competition and dynamism. This may require rethinking various aspects of merger and antitrust enforcement to address labor market concentration, the existence of powerful network effects, and the relationship between concentration and innovation. But antitrust is not the only policy lever to increase dynamism and competition.

In a new series of Hamilton Project policy proposals, we offer evidence-based policy reforms that could help to increase dynamism and competition. These reforms include:

*     Encouraging states to limit incentives to big firms by providing funds for start-up ecosystems and management training--but reducing those funds if states extend new tax incentives to incumbent firms.

*     Minimizing network effects that make it hard for consumers to switch providers, by mandating social identity and data portability to make it easier to move across online platforms.

*     Reforming occupational licensing rules, including scope of practice regulations in the healthcare sector, to help make the health care system more effective and efficient.

Creating a more dynamic and competitive economy will not happen with a single step or a single set of proposals. Instead, policymakers must lay the groundwork for successful entrepreneurship and more robust competition, in order to create a more dynamic economy that yields more widely shared prosperity.