Something is Rotten in the State of America: Product Market Competition Decline in the US?

Abstract

Based on available theoretical and empirical research, the paper demonstrates that although some decline in the product market price competition in the US has been observed, the non-price competition has become more intensive, therefore enhancing competitive constraints. Increased markups (although the magnitude of the change is disputed) are primarily due to investments in Research and Development and brand development, which have created a substantial increase in intangible assets and rise of fixed costs. In the environment of cost-heterogenous firms, markups are not necessarily evidence of market power, which should be associated only with negatively sloped residual demand curve. The declining share of labour in the value added and increasing income inequality cannot be explained by the ostensible decline of competition in the US product markets, but by technological progress and globalisation. Three vulnerabilities of the competition in the US are identified: killer acquisitions, common ownership, and legal barriers to entry.