Dr. Davis began the panel with a discussion of recent findings on increasing markups in the American economy. Research on this topic accelerated after a study published in 2020 found an increase in aggregate, economy-wide markups from 21% above marginal cost in 1980 to 61% above marginal cost at the time of publication. Dr. Davis commented that it would have been notable if price-cost markups had stayed flat during the COVID period, since that would imply that firms maintained their profit margins despite cost shocks. Her research instead finds that average markups increased during the COVID period, implying that firms on average increased profit margins even as their costs grew. This increase in average markup occurred not by individual firms increasing their markups but by sales reallocation from low to high markup firms. This creates an interplay with changes in concentration: higher markups were driven by a further concentration of sales among dominant firms.
Dr. Miller spoke next and asked the audience to consider increased markups as the start of the conversation rather than the conclusion. Dr. Miller commented, as he has in previously published work, that this literature on rising market power presents interesting findings but does not provide definitive solutions. Setting aside methodological concerns, Dr. Miller commented that there are many reasons that markups can change, some caused by lax antitrust enforcement and others not. He noted that industrial organization economists tend to analyze characteristics of particular industries rather than coming to broad conclusions about the economy as a whole (in part due to data limitations), and he offered three industries as illustrative examples that show considerable heterogeneity hiding in economy-wide changes.
- Cement: with coauthors, Dr. Miller evaluated the cement industry and found that markups in the cement industry increased due to the adoption of the precalciner kiln. This technological change increased scale and decreased marginal costs. These changes increased market concentration and average markups without increasing price.
- Automobiles: Dr. Miller pointed to research that indicated markups among car manufacturers have decreased over time while product quality has increased.
- Steel: Dr. Miller referred to research that showed decreasing markups and increased competition due to the adoption of the minimill, which is smaller scale and more productive than conventional mills.
Dr. Miller commented that while the above changes in markup and market concentration were caused largely by technological change rather than antitrust underenforcement, stringent antitrust enforcement is particularly important in industries with scale-increasing technological changes. For example, such industries may see a decreased number of firms in equilibrium, which may create conditions more favorable for collusion to develop.
Dr. Singer offered some potential explanations for the finding from Dr. Davis and others that firms expanded markups in response to the COVID shock. I summarize these mechanisms below.
- Firms used cost shocks as a coordination device to increase price above cost. Dr. Singer pointed to research on tacit coordination in earnings calls leading to “sellers inflation.”
- Firms exploited the information asymmetry created by cost shocks to unilaterally increase prices beyond the magnitude of increased costs.
- Firms used cost shocks as invitations to collude via public statements.
Dr. Davis commented that the mechanisms proposed by Dr. Singer are logically sound, but the contribution of these factors to COVID-era inflation is not empirically settled. Instead, she commented that the development of markups helps us understand what happened during this inflationary episode. Growth in markups suggests this was not the classic case of a wage-inflation spiral, where employees’ beliefs on future prices lead them to negotiate higher wages, which in turn increases price. If this phenomenon explained recent inflation, we would have expected to see margins stay constant or decrease as an increasing share of revenue went to labor costs. Dr. Davis further opined that the mechanisms that Dr. Singer laid out seem more likely to play out in the backdrop of higher concentration.
Drs. Singer and Miller both expressed skepticism for using antitrust tools to curb inflation. As mentioned earlier, Dr. Singer previously supported this idea in an article written in 2022, but has since come to believe that antitrust is too narrow and moves too slowly to combat inflation. For example, in his list of three mechanisms above, only the third is cognizable under current antitrust law (and only the FTC can address invitations to collude under Section 5 of the FTC Act). Dr. Singer also questioned sole reliance on Federal Reserve monetary policy to resolve inflation that was particularly acute in specific industries. He noted housing as an area where higher interest rates could further drive up prices by increasing the cost of lending. Dr. Singer instead proposed five policies outside the ambit of antitrust that could, in his view, reduce inflation.
- Congress should make common pricing algorithms per se illegal.
- Cities and states should prevent a roll-up of rental units by capping the share that can be controlled by a single entity in a neighborhood.
- Congress should allow states and private enforcers to challenge invitations to collude under Section 5 of the FTC Act.
- Congress should pass a federal anti-price gouging law, which would prevent firms from raising prices above and beyond an increase in costs. Industries experiencing above-average inflation should be automatically probed by a federal agency.
- Surveillance/dynamic pricing, where companies adjust prices based on customer attributes, should be subject to regulatory oversight.
Dr. Miller cast doubt on using antitrust to curb inflation for different reasons. He stated his preference for thinking of inflation as a macroeconomic concept with microeconomic roots (for example, OPEC policy caused the stagflation crisis of the 70’s). Beliefs (animal spirits to Keynes) are important to maintaining price increases, and we have a good toolkit for dealing with inflation in Federal Reserve policy. Dr. Miller cautioned against hasty conclusions about the interaction between antitrust, markups, and inflation. On one hand, increased demand is more likely to increase prices when markets are concentrated than when they are not. On the other hand, COVID inflation occurred largely due to supply issues, and we expect market power to dampen pass-through to downstream prices. Further, while turbulence can lead to coordination, Dr. Miller said there is not much empirical evidence that this has actually occurred. Indeed, he pointed to work he has co-authored that shows a weak and statistically insignificant correlation between changes in markup and changes in price.
Drs. Davis and Singer concluded the panel by looking to the present and the future. Both commented that the mechanisms driving inflation in response to COVID-era cost shocks could also play out in response to tariffs, and that the theories and evidence presented during the panel are likely to remain relevant.
