We all keep hearing that the Fed (the Federal Reserve) is confounded. The economy is growing (albeit slower than they would like), but inflation- given the unemployment rates- is virtually non-existent. And, what else is non-existent is a real rise in wages.
It shouldn’t be surprising. As Drs. Jan De Loecker (University of Leuven, Belgium) and Jan Eeckhout (University of London) have just discerned from the report they prepared for the National Bureau of Economic Research (NBER) entitled The Rise of Market Power and the Macroeconomic Implications. De Loecker and Eeckhout have determined that our government has allowed corporate America to become oligarchic, to become far too concentrated. And, that power, that lack of competition has afforded price gouging, damaged US economic growth, plus it has stagnated wages and the labor force.
There is a basic assumption these two researchers made- that when markets are competitive, companies can’t charge much more than their marginal costs. (Marginal costs are the costs of making one more product that they are currently producing.) Because when companies charge more than their marginal costs, another company sees the opportunity to enter the market and charge just that marginal price.
The researchers examined the performance of publicly traded companies in the US since 1950. They determined how much revenue exceeded their variable costs (labor, commodities, etc.), which afforded them the ability to determine the price markup beyond their marginal costs. And, that markup differential varied between about 1/8 and 1/3 (18% to 32%) from 1950 until 1982. And, like the drop in wages and the concentration of wealth among the 1% from 1982 on, themarkup differential has skyrocketed to 2/3 (67%). This “market power” (the ability to raise prices dramatically above marginal costs) is across the board- but is more prone to be seen in the smaller companies than the larger ones.
This isn’t the first study to find that concentrated market power creates economic maladies. President Obama’s Council of Economic Advisors reported about a year ago (April 2016) that the most profitable public companies had ridiculous rates of return on their invested capital. (Such returns are impossible when there are few barriers to market entry.)
Another indicator that market entrance barriers are high is a depressed rate in new business startups. And, when the economics are controlled by oligarchies, the barriers to market entry are high and the companies with that barrier power can easily raise prices (and profits)- plus they can depress the demand for labor far lower than would normally prevail. (You do recall that when the demand for labor is low, wages are radically repressed.)
Admittedly, technical equipment (computers, instrumentation, etc.) is now highly important to company operations. And, such materiel has shorter shelf lives than obtained previously. That’s why depreciation is slightly higher now (16% of Gross Domestic Product compared to 12%) than that obtained in the 1960s.
So much for government oversight. 
Questions: 1, What products are priced at a level to be considered price gouging? 2. Where are the companies that theory says should then want to enter as new upstarts to compete? 3. What is government oversight (or lack thereof) – is there an agency that is supposed to regulate consumer pricing?
Great questions, Alessa!
1. As stated by the authors [pararaph 3] (and considered to be the typical process by which pricing is developed): When markets are competitive, companies charge only slightly more than their marginal costs. If not, competition swoops in and gains market share at the marginal price.
2. Those companies are typically new entrants, but they could be companies with the ability to produce/prepare what is already being sold.
3. There are agencies that preclude companies from becoming monopolies- Federal Trade Commission, Justice Department, State agencies. NO agency regulates pricing per se- they are charged with examining pricing when a company is to be acquired or merged. (the last time we had price controls was under President Nixon. (Yes, a Republican.)
1. yes… understood the quote. “…has afforded price gouging”… sounds like they had identified price gouging and I was wondering on what products. 2. So are these new/existing companies NOT trying to enter where there is price gouging/high margins? 3. By “precluding” that means stepping in and breaking things up? Say like Ma Bell? Do they consider internet giants like facebook and google such entities?
2 doesn’t occur in oligarchic industry, because the barriers to entry have been raised to make it nigh impossible for new entrants. In an easier fashion, consider the condition when a firm obtains FDA approval for a new drug (not a generic). They are given exclusive rights to sell that product for years. And, have no competition. ONce that period ends, is when generic firms try to compete (and often succeed), using marginal pricing.
3 is exactly what needs to be done. And, our government has failed to do so.(With the oft-cited exception of Microsoft and their original browser, Explorer. Which is how Chrome became so prevalent.) Now, with the “Russia scare” and the actions of FB and Google, the government realizes the consequences and are beginning to act. Europe, on the other hand, has been far more forthcoming in this area.