A study analyses the relationship between market power and companies’ profit margins

A study analyses the relationship between market power and companies’ profit margins

The study, published in the National Bureau of Economic Research by Jan Eeckhout, UPF-ICREA research professor, studies data for the period between 1950 and 2014 relating to US companies and documents the increase in market power and secular economic trends.


Despite the economic growth and prosperity of recent decades, wages have stagnated and more people of working age have not entered the labour market. In addition, jobs last longer, which improves job security but also renders the labour markets less dynamic and there is less social mobility -fewer people change jobs, and it takes longer to find them.

Jan Eeckhout, ICREA research professor with the Department of Economics and Business at UPF, also linked to the Barcelona GSE and University College London (UCL), along with Jan De Loecker (Princeton University), have published a paper in the National Bureau of Economic Research (NBER).

This work links the price increases of the last six decades in the United States to macroeconomic influences. The paper studies data concerning the US economy between 1950 and 2014, documenting the evolution of price increases, and connects several secular trends to increased market power as of 1980.

From 1950 until about 1980, the increase in prices remained stable, with profit margins at around 20%. From 1980 to 2014, a different, rising growth is observed, with an increase in prices on the cost of production soaring from 18% to 67% in this 35-year period. The causes of this sudden gain are not clear, but the paper suggests that antitrust law and rapid technological change allowed companies to create and maintain market power.

The macroeconomic and political consequences of increased market power

Market power is a company’s ability to increase profitably the market price of a good or service over its marginal cost. On average, US corporate profits have increased four times more compared to previous decades. This is not the case for all companies, but the trend is towards greater market power. This can have damaging consequences not only for the workers, who see their wages fall, but also for consumers, who pay higher prices.

The study, which uses an innovative approach called the “production approach” (based on companies’ individual production), investigates the implications of this increased market power for macroeconomic returns in recent decades.

The authors highlight the implications of increased average market power in the economy: a decrease in the labour share; an increase in capital share; a decrease in low skill wages; a decrease in participation by the workforce; a decrease in labour flows; a decrease in migration rates, and the deceleration of aggregate output.

In addition, the researchers mention two consequences that increased market power leads to on a political level: the first refers to inflation, in which they highlight that inflation has been higher than it would have been without increased market power; and the second refers to the securities market: the stock exchange, under the influence of market power, is overvalued in relation to a competitive economy.

Reference work:

De Loecker, J., Eeckhout, J. (2017). ”The Rise of Market Power and the Macroeconomic Implications”, NBER Working Paper No. 23687, DOI: 10.3386/w23687