In general, it is not in the interest of big business to
show large profits, as this may potentially attract competition from newcomers.
In the last twenty years, however, American profits have soared but new entry,
domestic or inward FDI, has been scarce. Company size (cf. M&As) and consolidation
on the one hand, and transaction costs (cf. regulatory lobbying by potent incumbents) on the other, pose significant barriers
to entry that could explain all this.
In addition, and contrary to what was the tendency 15 years
ago, i.e. un-commoditization of service (ocean transportation) and investment
in complimentary sectors (logistics), so as to differentiate and thus command a
premium price from the willing shipper, companies are again today reverting to core business,
shedding ‘peripheral activity’ and aiming at greater market share in core business
(transportation), through mergers and the strengthening of strategic alliances.
The Economist’s figure above shows that, in the past 20
years, companies have become more focused (and industries less fragmented), while, at the same time, the market
share of the top 4 companies (CR4), in the 900-odd US sectors examined, has
increased from 26% in 1997, to 32% today. The lack of entry, noted above,
refutes William Baumol’s theory of contestable
markets and, apparently, in the absence of effective regulation,
concentration does lead to market
power. For example, concentration in railroad transport in the USA has led to a
40% increase in profits, and a doubling of return on capital (RoC), in the last 10 years.
In conclusion, two thirds of the Americans believe that
their markets are rigged. Maybe they have a point there, and this point is
central in Hilary Clinton’s electoral campaign. If she is serious about this,
i.e. on taking on concerted business practices,
she most definitely deserves half a chance; just for this, if nothing else. HH
No comments:
Post a Comment