In economics, there has been a great deal of investigation into how the size of businesses in a space can affect the products sold to consumers and wages paid to workers.
Ideally, if a company is overcharging a product or underpaying workers, consumers take their business elsewhere and employees continue job-searching, respectively.
However, when a company is a very large force in a market, it can skew those environmental forces that are supposed to bring down costs of goods, improve customer experience, and pay workers fairly.
Large firms in a market have additional freedom to charge more, because there aren’t enough other businesses to compete and drive down prices or bring wages up. These large firms can also prevent new businesses from entering the market. Large firms may outcompete entrants through greater brand recognition and customer loyalty, or more predatorily, slash prices to take on short-term losses and drive the new competitor out of business.
On the other side of this, a single employer has more power to keep wages for workers lower if those job applicants don’t have many other choices of employer.
Notable incidents of a few firms controlling national manufacturing, rail, and oil in the late 1800’s spurred the creation of the first
“antitrust” laws. These laws gave the federal government the authority to break up or prevent the expansion of massive companies to protect consumers, workers, and overall competition in markets.
Take this excerpt
from Lina Khan, a legal scholar who is important later in this story:
“For one, competition policy would prevent large firms from extracting wealth from producers and consumers in the form of monopoly profits… Another distinct goal was to preserve open markets, in order to ensure that new businesses and entrepreneurs had a fair shot at entry. Several Congressmen advocated for the Federal Trade Commission Act because it would help promote small business”
These antitrust laws were strengthened with the Clayton Antitrust Act in 1914, and for decades, federal courts strictly blocked companies from controlling large portions of market share.
A new brand of economic theory, however, would come to challenge conventional wisdom about competition born out of the “Chicago School” of economics, inspired by University of Chicago economists like Milton Friedman.
The Chicago School had significant influence over the Reagan administration’s policy, including in guidelines for how to pursue antitrust.
The DOJ’s Antitrust Division and Federal Trade Commission (FTC) are the two main bodies for antitrust law enforcement in the US. Generally
, the DOJ focuses on industries like airlines, banks, and telecom, whereas FTC deals more with industries where consumer spending is high: computer technology, Internet services, food, energy, and most importantly for us right now, healthcare and pharmaceuticals.
New interpretations of antitrust law suggested that market concentration is not necessarily bad. This class of legal scholars argued that market concentration can also be the result of abnormally high productivity and value provided by a firm.
However, and this has been a great critique of the hands-off approach to antitrust enforcement taken over the past 4 decades, concentration does not necessarily have to be the result of higher value delivered to customers. Some economists call these instances of high market concentration as having “rent-seeking” firms, which means they are extracting wealth from a market without delivering value.
Consider this comment
from an article by the National Bureau of Economic Research which refers to rent-seeking concentration as “negative concentration”:
Over the past 20 years, however, negative concentration has become relatively more prevalent in the United States. Recent increases in concentration have been associated with weak productivity growth and declining investment rates.
Telecom is a notable example of these rent-seeking outcomes and why American consumers pay more than twice the amount for cell phone and broadband services compared to other developed countries.
In healthcare, it’s not surprise that concentration in healthcare providers can mean that hospitals get away with charging more for services and paying burned out medical professionals even less.
It may not be shocking to see that amidst an affordability crisis in healthcare, the valuation of merger and acquisition deals for healthcare businesses just keeps going up.