As a truck driver starts his shift, he turns on the radio. The news reports record corporate profits and a booming stock market. His pay, however, is struggling to keep up with rising prices. Does this story sound familiar?

It very well could because, as you can see here, in the last decades, median wages have remained relatively stagnant, while stock prices have experienced tremendous growth.

Some people think rising stock markets are just a sign that the economy will do better in the future, perhaps thanks to A.I. Others think it’s because rich people are getting richer and therefore buying more assets, driving up the price.

But, in the US populist politicians on the left and right are increasingly blaming giant monopolies like Amazon and the other usual suspects.

“””in sector after sector you have a handful of corporations controlling what’s going on, engaging in a lot of price fixing“””

According to Bernie Sanders, this is not just a moral issue. It’s also

“””it’s bad economics“””

But, is that true? Doesn’t economics tell us that efficient, innovative companies like Amazon, Microsoft, and Nvidia should be rewarded for their innovation, while inefficient firms shrink and then disappear? To find out, besides my usual deep dive into the scientific literature, I reached out to an expert on market power, Professor Jan Eeckhout, author of the book the profit paradox, who told me that

“””We see that what we call market power- dominance of large firms- has increased and this has enormous implications for the entire economy“””

Luckily, he also argues that, it really doesn’t HAVE to be this way because

“””We have very good policies to make these natural monopolies competitive. And the type of policies that make it competitive are the type of policies, like in sports, where you have to have a referee, where you have to have a clear set of rules and these rules are leading to more competition. They are pro-competitive.“””

but before diving into whether or not giant monopolies are bad and how we can fix our economies, we first need some context. That is, how did we get here?

How did giant corporations come to dominate our economies?

To answer this question, we need to go back to the 1980s…

<80s montage @Safia Mohamed ?>

In the early 1980s, profits per product, what economists call markups, were ACTUALLY lower than they ever where. Meanwhile, stock prices, adjusted for inflation, where also at an ALL TIME LOW. But, then something strange happened, not only did BOTH mark ups and stock markets return to their previous peak, they went into the stratosphere.

But, why? What happened in 1980 that made big companies so much bigger and ESPECIALLY so much more profitable?

My research led me to 2 key events that made companies more profitable… AND 2 SEPARATE key events that made companies BIGGER BUT NOT NESESSARILY more profitable. This distinction is crucial because, as we will see, massively increased profits for the biggest firm may be a problem for the economy. But, big giant firms in general, this may not always be a bad thing.

To see why, let’s discuss the first key event that made companies naturally bigger: the mass adoption of

“””Digital technology… 1980’s was really the point in which households, firms, and society as a whole starts to use computers… In the 1990’s is the world wide web that comes in action and has an economic impact. In 2000’s is probably mobile technology. 2010’s is probably big data. 2020’s is probably gonna be AI. It’s not like this one thing, press a button and you have digital technology. This is an evolution.“””

Crucially about this evolution, digital technologies have what economists call “economies of scale.” That is, the more products you make, the less they cost you to make them.

One of the most important reasons for this is the presence of fixed costs. Consider the airline industry. To produce an airplane, you obviously need to pay for materials and man hours. Because these come back for each plane produced, Economists call these variable costs.

However, before you can produce your first airplane, you need to do years of research, testing, and you need to build an entire factory. These costs are called fixed costs because it doesn’t matter how many planes you make. You always have them. They are FIXED. So, if you only build 1 plane, essentially you need to make back the variable costs PLUS ALL fixed costs when you sell that single plane. If you make two planes, the variable costs remain. But, you can spread the fixed costs over 2 planes. The more planes you make, the more you can spread the fixed costs, until eventually, each plane costs you almost as much its variable costs.

Now compare this to a handcraft furniture workshop. Each piece of furniture requires skilled labor from start to finish—cutting, assembling, and finishing. Therefore, variable costs are high. Meanwhile, fixed costs, like the cost of tools and potentially a room to work in are relatively low. Therefore, a craftsman only needs to make a few chairs to make back the costs of his tools.

Because of these lower fixed costs, it’s far easier to enter the market for handcrafted furniture than to enter the aircraft industry. High fixed costs act as, what economists call —a barrier to entry— into any market.

Therefore, as a rule, industries with high fixed costs tend to have fewer competitors. This is why just after the second world war, you only had a couple of plane makers per country, like Boeing and Douglas in the US, Fokker in the Netherlands, Sud Aviation in France, and De Havilland in the UK, while each of these countries had hundreds if not thousands of artisanal furniture workshops.

However, today, like more and more industries, the global airliner industry is dominated by giant monopolies, 2 in this case: Boeing and Airbus.

So, what changed? This gets us back to prof. Eeckhout’s point about the invention of digital technologies since the 1980s. Essentially, his point is that each wave of innovation — computers, better communications, the internet, big data — has increased economies of scale by raising fixed costs. These technologies allowed Boeing, but also companies like Amazon or Zara to conduct research and testing more efficiently, and to coordinate ever larger global supply chains.

As a result of the digital revolution fixed costs became a larger share of total costs. Therefore, all affected markets became more concentrated, dominated by a fewer —larger— players.

This dynamic was supercharged for the new industries created by the digital age like computer operating systems, and social networks. For each of these products, the variable costs of serving another user is virtually zero, meaning that NATURALLY, these new industries are dominated by giant companies.

But, technological change is not all that happened in the 1980s. This IMF graph shows that 1980 was also the starting point of hyper globalization, the removal of tariffs and other barriers, which meant that

“””we now have a global economy that a lot of the activity that or markets in which you are operating are basically the whole world“””

So, while previously an airliner could only get so big because there was only so much national demand, globalization means that, to remain competitive, companies HAD TO get bigger and bigger.

These two events, the adoption of digital technology and globalization are the two key things that happened in 1980 that can explain why firms have become BIGGER. But, they don’t FULLY explain why these giants have also become so much more profitable.

After all, in a ‘free market’ if big companies earn massive profits, then OF COURSE competitors will soon come in to try to take some of those profits, which will drive the price down. Yes, higher fixed costs may mean that it’s more difficult to get into the airplane manufacturing business than in the furniture workshop business. But, as famous U.S. economist Alan Greenspan pointed out in the 1960s, U.S. financial markets are so large, that in theory, ANY TRUELY UNFAIR monopoly should be impossible to sustain.

And, yet this is not what we have seen today. Not only have firms gotten much bigger, their profits have gone up like crazy, and stock market valuations of the biggest companies have, followed suit. Surprisingly, despite these record profits, the number of start-ups challenging these highly profitable firms has relentlessly gone down… not UP, as Greenspan predicted…

So, what happened?

Why did the story of big firm competition fail?

Essentially, I found 3 reasons in Eeckhout’s book.

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So, yes clearly there are firms challenging the latest dominant monopolies. But, they are fighting an uphill battle for at least 3 reasons. The first reason is that the digital economy brought a new

“””source of these scale economies which is called “network externalities”. I like a social network because everyone is on that social network, that’s where the value is coming from. And again, there is no point in having two equal social networks. “””

Think about it. If all your friends are on a platform like Instagram, Tinder, or Facebook, then it only makes sense to switch to a new platform if all your friends do it as well. This dynamic makes it incredibly hard for new competitors to break in, meaning that existing firms can essentially charge higher prices, or in the case of social networks, sell your data to advertisers, rather than keeping it private.

The second reason why competition has failed is that when competitors DO emerge, dominant firms can often buy them out. Facebook bought Instagram. Match Group bought Tinder — and later Hinge. These mergers let monopolies neutralize threats and entrench their dominance. This trend not limited to tech. For example, in the pharmaceutical industry research shows that acquired drug projects often disappear if they overlap with the buyer’s existing products.

Monopolies can call these acquisitions “synergies.” That can be true sometimes, but let’s be honest — it’s just as often about killing competition. This is great for investors. Just listen to how legendary investor Warren Buffet describes his perfect investment.

“””I don’t want a business that is easy for competitors. I want a business with a “moat” around it. I want a very valuable castle. And then I want the duke who is in charge of that castle to be honest and hard working and able. AND THEN I WANT A BIG MOAT AROUND THE CASTLE. “””

The reason is simple, when a company operates like monopoly, with a big “moat” around it, it can basically charge the price it wants, which generates extraordinary profits for the firm. Of course, this anti-competitive behavior goes against the interest of consumers. So, to keep markets competitive, we had very strict anti-trust laws in the 1950s, 60s and early 70s. But in the following decades, economists like Greenspan successfully argued that markets were ALWAYS self-correcting and that if bigger companies were more profitable, this was purely because they were more efficient.

This brings us to our final reason why firms got way more profitable after the 1980s, which is the loosening of anti-trust laws which led to far less court cases brought against companies who practiced anti-competitive behavior, or bought up the competition.

This means we can now can answer our question about what happened in 1980. It were 5 things. First, digital technologies and globalization made companies bigger and bigger by increasing economies of scale. Then, the increased prevalence of network effects, and increased anti-competitive behavior by firms ENABLED BY looser anti-trust laws can explain why big firms have become so much more profitable AND why stock markets have done far better than wages.

This clearly sounds like a bad thing. But, is it really? Sure, perhaps giant monopolies do engage in anti-competitive practices. But, it’s hard to deny that companies like Google, Microsoft and Nvidia are some of the most innovative companies around. So,

Are giant monopolies actually making our economies worse?

Prof van Eeckhout’s answer is yes. In his book, he mentions 4 main ways that monopolies are making our economies worse.

The first is that monopolies charge higher prices for consumers. This is bad in itself. But, it also creates a second bad effect which is that higher prices mean less demand. Less demand means less production. Less production then means monopolists hire fewer workers than firms would in a competitive market. When this pattern repeats across sectors, total demand for workers falls—and with it, workers’ bargaining power, meaning workers have to accept lower wages.

This can explain, that while productivity used to lift wages—when firms became more efficient, workers earned more—since the 1980s, that link has largely broken, and wages for typical workers have essentially stagnated.

But, of course, NOT ALL wages have stagnated. This brings us to the third way monopolies are making our economies worse, which is increased wage inequality. Simply put, as dominant firms expand, they compete aggressively for top performers. For example, since a marginally better strategy or a few lines of superior code can be worth millions of monopoly profits, big Tech monopolies like Facebook or X are now paying millions to superstar A.I. engineers. The same effect also helps explain why CEO pay has exploded since the 1980s.

Higher prices, lower overall wages, increased inequality. This all makes intuitive sense. The fourth way monopolies are making the economy worse, which is about innovation, makes less sense.

“””It may sound counter intuitive, but these dominant firms of course they invent a lot in innovation but if I would take a hundred small firms that are as big as one large firm, these hundred small start-ups jointly innovate more than this one large firm, and this is something that we see that innovation is actually declining in firm size“””

So, to sum up, in this book, Eeckhout tells us that the latest research indicates monopolies not only means higher prices for consumers, it also means lower median wages, higher wage inequality, and less innovation.

That’s not great… so essentially the question then becomes

What can we do to fix our economies?

According to Eeckhout the answer may be found in sports

“””The way that we organize sports is to make sure that there is a level playing filed, that there is even financial constraints on how strong you can become, especially in US sports“””

“””like in sports where you have to have a referee where you have to have a set of clear rules. And these rules are leading to more competition. They’re kind of procompetitive.“””

In theory, this is not that difficult. It means simply going back to some of the anti-trust regulations that kept monopolies in check during the 1950s, 60s and 70s. Of course, technological advances means we can’t do things exactly the same way as back then. Therefore, prof. Eeckhout also suggest in his book that we encourage a concept called interoperability.

Interoperability means separating the entity that manages the network from the operators of that network. For example,

“””If you try to send a message from Whatsapp to Telegram: that’s impossible. There is no interoperability in messaging. Why? Because if you are Whatsapp, you don’t like interoperability.“””

But, what if we force Whatsapp to separate the network from the operation. The network are our contacts. The operation is the messaging app itself, the emoticons, the privacy features and so forth. Forcing companies to accept each others messages could give messaging challengers like Signal and Telegram a fair shot, and encourage Whatsapp to make its service better. That’s the magic of competition.

There’s some pretty compelling evidence this really works. For example, in Europe

“””they’ve made the high-speed rail interoperable. This is now legislation that is coming from the European Commission that says, you know, I have a train line between Paris and Lyon. Now the Spanish company can go on to the train line. What is the network? The network is the line. There is only one. If it was run by the French company it’s a monopoly: they own the line and they say: no one else can come on it. But now the new legislation says no, no, if a Spanish company, a Dutch company, an Italian company, a German company wants to compete, which they do today.“””

Recent research shows that this policy has benefited European travelers by lowering ticket prices, with ticket prices decreasing around 28% after nine months of competition. Cheaper fares mean more people can afford to travel, which in turn boosts demand and encourages operators to hire more staff.

So, perhaps some of the many problems that we frequently talk about on this channel, like inequality, rising prices, and economic stagnation are actually a result of decreased competition. Of course, the world is not so simple that one explanation can explain all of this, there likely are other things at play as well. But, still, I thought this competition angle was particularly interesting because it may be politically less challenging than just taxing people more.

But, yeah, that is my take. What do you think? Can we make markets competitive again? Or is that a naive pipedream given that big business tycoons are increasingly influencing politics?

Let me know in the comments below, and if you want to demonopolize your tech, don’t forget to check out our Sponsor proton via the link in the de scription of this video.