A recent report by Goldman Sachs’ global research team highlights a new study showing that large, dominant, superstar companies are paying lower wages and earning higher profits. I’ve flagged that research myself, but when Goldman says it’s worried, you know things have really gotten serious. American industry is increasingly dominated by a shrinking handful of giant companies.
Why is Goldman complaining about the trend? After all, the big bank presumably has many ways to make money off of corporate behemoths. Oligopoly raises profits, which sends stocks higher, contributing to fatter fees for financial companies such as Goldman that do things such as asset management, brokering and market-making. Goldman also handles mergers and acquisitions, which are a key way that markets become more concentrated.
Of course, if market concentration gets out of hand, it could start to cut into the bottom lines of even big financial firms. One reason is that concentration reduces idiosyncratic volatility in markets, meaning individual stocks don’t go up and down as much. That means traders have less reason to trade, since there are fewer bargains to be had under those conditions. Less trading means less profit for brokers, dealers and market-makers. In a recent paper, economists Söhnke Bartram, Gregory Brown and René M. Stulz show that the increasing domination of public markets by large, old companies – the superstars that economists are warning about – is responsible for the increasing correlations between stocks.
Stulz also has another new paper, along with Craig Doidge, Kathleen Kahle and G. Andrew Karolyi, illustrating just how much the U.S. public markets are devoid of small, fast-growing companies. The days when a new company such as Amazon.com Inc. – which went public in 1997 at a market value of just $438 million – would rush to list itself on the exchanges are long gone. Uber Technologies Inc., for example, is still private, but is valued at about $50 billion. It’s not just tech startups, though – smaller companies in general are moving off of the exchanges. This is one big reason why the public markets are shrinking.
The biggest threat from the increasing dominance of big companies isn’t to Goldman Sachs, or even to retirement plans; it’s to workers and consumers. When companies squelch wages and raise prices, it reduces economic activity. It pushes workers out of the labor force entirely, sending them home to play video games on the couch as their job skills and work ethic rot. And it can result in lower output too – fewer plane rides, fewer people buying broadband internet, fewer people buying new cars.
In past eras, the government acted to stop companies from getting too big. It could do the same now by strengthening antitrust enforcement, preventing big mergers and reviewing them after the fact.
But the fact that the stock market increasingly depends on dominant companies may stop the government from ever really cracking down. If monopoly profits are the main thing keeping upper-middle-class Americans’ retirement accounts afloat, most politicians will be very reluctant to do anything that fosters greater competition.
The risk is that economy becomes trapped in a toxic cycle. As industries grow more concentrated, dominant companies become a bigger piece of the stock market, and their profit margins push stock valuations higher. Politicians naturally will be less willing to take steps to make markets more competitive, allowing superstar companies to become even more powerful. All the while, retirement accounts do OK, but workers’ wages and the economy suffer from decreasing competition.
It’s important to reverse this vicious cycle before the problem becomes too severe. A bit of antitrust now would go a long way toward preventing oligopoly from turning into oligarchy.
Noah Smith is a Bloomberg View columnist.
