In the continuing controversy over economic inequality in the United States, the focus is on such factors as the decline of organized labor, tax cuts for the well off, outsourcing of American manufacturing jobs overseas, and the substitution of capital for labor. But the lack of competition in many sectors of the economy is also a powerful driver of disparity, redistributing income and wealth from consumers generally to the affluent.

As with lengths of skirts, lapels on men’s suits, and other more or less important customs, there are also fashions in markets. Over the last two decades, many firms have been consolidated across the U.S. economy. Oligopolies are common and concentration is increasing in numerous industries.

Many markets are now oligopolies, in which a small number of companies account for most sales. In major industries from telecoms, social media and internet search to retail, airlines, beer, pharmaceuticals, hospitals, banks, the American public has seen a few giants come to dominate. What competition does exist is among just a few participants, not exactly the type described in textbooks.

These firms use their market power to increase prices, drive down wages and assert greater authority over workers. They find ways to deter new firms by creating and maintaining barriers to entering the market, and use economies of scale to exercise strong leverage over suppliers. In addition to raising prices relative to what they would charge in a competitive market, these powerful companies may also reduce quality or convenience, modifying product features and reducing customer discounts. All this leads to a transfer of wealth from buyers to sellers.

It should not be overlooked that consolidation of market power also concentrates political power, thanks to the lobbying muscle of oligopolistic companies. Economic and political power can be mutually reinforcing. As things stand, market power gives these companies the resources to protect their competitive advantages and leverage their advantages through the political process buying the all-important access.

Take the $2.5 trillion health care industry, where rising prices are partially driven by increased consolidation. Consider the large number of hospital mergers that limit competition among hospitals. Today, many Americans today live in areas where there is little such competition.

The same is true in other economic sectors. Merger mania in the airline industry has resulted in eight majors combining to create four giant carriers over the past decade. Not to be ignored is the fact that a handful of large institutional investors such as BlackRock, Vanguard, Fidelity, and State Street are among the top shareholders for all four major airlines. Given the huge extent of common ownership in the U.S. airline industry, it is not surprising that the price wars of the 1990s have ended and profits are on the rise as companies may refrain from competing aggressively when their competitors have the same large shareholders.

Consider the drastic increase in banking industry concentration, where too big to fail banks, instead of getting smaller, are pretty much taking over the financial universe. The five largest banks in the U.S. – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp – have about $7 trillion in assets. That’s nearly 45 percent of the industry’s total. The other 55 percent of assets are divided among 6,000 institutions, according to the Federal Reserve. The top-10 banks’ share of the deposit market has increased from about 20 percent to 50 percent from 1980 to 2010.

Looking beyond individual industries affected by excessive market power, the bad news is that this concentrated power leads to concentration of wealth and income, and contributes to increasing economic inequality because the returns from market power go disproportionately to the wealthy, like company shareholders and senior executives.

God love them, for they are reaping rewards to which ordinary Americans have no access. Amen.

Originally Published: October 13, 2018