Competition is withering on both sides of the Atlantic

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SINCE 1978 total corporate profits in America have risen from 1.9% of GDP to 4.5%. Although this increase has delivered a windfall for shareholders, it may reflect lower dynamism in important sectors of the economy. Three different statistical measures suggest that there is good cause for concern.

Take concentration first. The numbers need to be treated with caution, but between 1997 and 2012 it rose in two-thirds of 900-odd census industries, with the weighted average market share of the top four firms growing from 26% to 32%. It continued to rise in 2012-14. A tenth of the economy is made up of industries where four firms have more than two-thirds of the market.

Profits are abnormally high as well. A good measure is the free cashflow of corporate firms. This is 76% above its 50-year average, relative to GDP. There are pockets where profits and prices are high compared with other countries, including airlines, credit cards, telecoms, pharmaceutical distribution and credit checking. As anyone who has squeezed into an old economy-class seat or signed fiddly receipts at the check-out knows, these industries clearly lag behind the rest of the world. They also involve thickets of regulation.

As for openness, America is still the world’s largest centre of innovation. It spends $450bn a year on R&D, 20% more than China and more than Europe, Japan and South Korea combined. But business churn is subdued: of the listed firms that made a very high return in 1997, 50% still did in 2017 (using a hurdle of 15% and excluding goodwill). Fewer new firms are being started. And America’s opening up to the world has stalled, with trade to GDP falling steadily since 2011 and the output of foreign firms’ subsidiaries in America stagnating.

The leading European firms tend to be smaller and more internationally oriented than their American counterparts are. Nonetheless, concentration is creeping up in Europe as well. A forthcoming study by Chiara Criscuolo and colleagues at the OECD, a club of mainly rich countries, shows that the average market share of the top four firms in each industry has risen by three percentage points since 2000, roughly half of the rise in North America. The free cashflow of non-financial firms as a share of GDP is 18% above its 20-year average. A very profitable listed firm in 1997 had a 46% chance of still being very profitable in 2017. Like America, Europe has suffered a decline in the number of new firms. It is weak on innovation, spending half as much on R&D in absolute terms as America. It scores better on trade, however, which has risen slightly relative to GDP since 2007.

Read our full special report on competition here.

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