Regulatory Policy Is Currently Based on Feelings Not Data

Government policy on competition is a micro thing that has macro consequences, as far as it affects growth.

Regulation to (hopefully encourage) competition by discouraging the potential for increased market power that can come with increasing concentration of an industry in fewer firms — is a decidedly more popular in left of center political parties (like the Democrats in the U.S.).

Monopolies do their monopoly thingie by marking prices up over marginal costs more than other industrial structures. That shifts surplus from consumers to producers. The regulatory thinking is that all moves within an industry towards fewer firms make that behavior more likely. 

But that doesn't just happen by itself. No product can be marked up much if its demand is inelastic. Think about it: the price of Coke is never "jacked up" because you and others will just switch to Pepsi. In economic jargon, that's saying that your demand for Coke is elastic rather than inelastic. In the real world then, there's very little taking advantage of consumers if their demand is elastic, but certainly the potential for that if their demand is inelastic. Do note that every firm will try to mark up more when demand is inelastic, whether or not their industry is more concentrated or not.

So the economic argument for price regulation rests on two features: 1) demand must be inelastic, and 2) the industry must be concentrated enough to act on that. The position of left/liberal regulators in the U.S. and other countries is that both of those have gotten worse over the last generation or two.

There's new research on both.

***

In "Rising Markups and the Role of Consumer Preferences" the authors measure marginal costs, prices, increased markups, and customer preferences. What they find is that marginal costs have been dropping. That's good: firms are being more efficient. But prices have changed much less, so markups must be getting bigger. What's interesting is that their evidence on consumer preferences indicates that this is because you and I have gotten less price sensitive, while the evidence on marginal costs indicates that industries have gotten more rather than less competitive. In "Trends In Competition In the United States: What Does the Evidence Show?" the authors note that industries are concentrated, but both in places where concentration is more heavily and less heavily regulated (suggesting that such regulation is a waste). Further, that concentration seems to be driven by technological improvements that benefit consumers through lower marginal costs. 

It probably should be noted that one of the authors of the second study was the chief economist at the Federal Trade Commission. He resigned early in the Biden administration; suspicions are that this was because they were taking regulatory enforcement in a less fact-based direction.