IMF – big companies raise prices and stifle innovation

This column was published 2 years ago in FinnishNews/Nordic Week. Nothing has happened to reduce Finland’s dependence on large companies since then. Our export intensity has weakened, meaning that the value of exports as a percentage of GDP has fallen. Big companies stifle competition, increase prices for consumers, and reduce innovation according to this IMF study in all countries examined.

A study from the IMF has been published about how large companies in 74 countries, including Finland, are increasing prices as they gain market power – here is a link to the study.

The study finds that there is a relationship between price markups (price increases) and indicators of market power such as profits and industrial concentration.

The study focused on the relationship between these markups and investment, innovation and labors’ share at firm level, in other words – are wages being depressed by big firms.

The study reveals evidence of a relationship that of what they call “non-monotonic” which in plain English simply means that thing start out positively good developments. Investment and innovation increase with labor getting a better deal, but as the companies achieve bigger market power then the opposite happens, and they get entrenched in their comfortable monopoly/oligopoly state where they naturally like to stay there.

The results are so obvious that it is almost embarrassing for the writers to publish something that has been known by consumers for decades.

As has been written in FinnishNews for the last 3 years, Finland probably has the world record for having more oligopolistic companies in the retail sector, banking, constructions, pensions, insurance, media, travel, dairy, fuel, alcohol, drugs, energy, energy transmission, etc., than any other developed economy. We can boast between 60% and 84% of just a few companies – in some cases just 2 or 3 dominating their respective markets.

The result is that Finns pay between 30% to 50% more for food and drinks than most places in Europe. Construction concentration means that new homes cost much more than older homes, with these same construction companies holding onto and not developing large tracts of land to keep prices high. It is the same with pensions and insurance where a few companies charge high fees and keep the competition at bay with aggressive lobbying.

The 2 big media companies are very dependent on advertising from these large companies and that means that articles on this subject are muted. They have little incentive to break up the last remnants of their income stream now that Google, Facebook and LinkedIn/Microsoft have found lucrative advertising sources.

The surprising thing is that politicians have been sitting on their backsides and allowed these big companies to grow with any attempt to break them up so as to encourage more competition, more innovation and higher levels of employment with fair wages. But lawmakers have also been locked into these interests with lucrative jobs when they leave politics while some politicians get to enjoy election sponsorship with free venues and lots of coffee and cakes when gathering voters together before the elections. A third group of politicians get to sit on the boards of many of these companies. The game of musical chairs is intensive and deep seated in this political space, with lobbyists seeking out regular meetings with MP’s.

Naturally not all of the above conclusions apply – that would be too much to expect. Many other studies point out that there are other causes for these perceived problems. For instance, workers should have the right to sit on a company’s board as in Germany and in Sweden. Publicly-quoted companies should not be required to make quarterly reporting and share buy-backs should be limited by law. There are many tweaks that could result in better corporate governance…

… and there are several older proposals to deal with the structural problems of retail banking, where we have seen a many banks with some very bad habits under the rubric of “moral hazard” continuing to consolidate and become a “too big to fail”.

Their lobbying power and advertising budgets give them strong walls that stop competition, and taxpayers, the depositors, end up being liable for their losses without any possibility of benefiting from the excess profits that these banks make for management and shareholders.

We know that regulation does very little to protect taxpayers. The gamekeeper has limited resources and reacts slowly to bad practices and white collar crime. They are soon faced with a barrage of highly paid lawyers and long drawn out legal processes – John Kay has written a great piece in favor of having narrow deposit banks ring-fenced called “Should we have narrow banking”in 2010 for an LSE publication, to be found on the internet. And Andy W. Mullineux of the University of Birmingham has come to the same conclusion is a study in 2012 called “Banking for the Public Good”

Professor Charles Goodhart has also said in lectures in the 1980’s that deposit-taking, plain-vanilla home financing and the financing of small SME’s for growth is a public utility and such activities should be run by a state-owned bank! In today’s markets we can see many good examples of such ring-fenced banks offering good services to these small retail clients.

The private sector has no monopoly on cost efficiency and the public sector should not be automatically accused of always being inefficient!

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