The state of competition
Jan De Loecker is Professor of Economics and Research Professor at the Katholieke Universiteit Leuven, and Pinelopi Koujianou Goldberg is the William Nordhaus Professor of Economics and Global Affairs at Yale University
Concerns about rising market power and declining business dynamism have become a central theme across advanced economies. Corporate profit margins, industry concentration, and equity valuations have all climbed, while firm entry, exit, and labour mobility have slowed. Labour’s share of income has fallen and the gap between median and average earnings has widened. Although these patterns were first documented in the US, similar trends have since appeared across Europe and other high-income economies (Autor et al 2020, De Loecker and Eeckhout 2020, 2025).
The debate over the origins and implications of these trends has been shaped as much by ideology as by evidence. One camp insists competition is functioning well and that fears of market power are overstated. The other blames lax antitrust enforcement for an economy increasingly dominated by powerful incumbents. Neither narrative captures the full picture. Measurement challenges in concentration ratios and mark-ups are real, but the broad empirical patterns are too stark to ignore. The more important question is how to interpret them.
A perfect storm: globalisation meets technological change
The past three decades of hyper-globalisation dramatically reshaped both product and input markets. Falling trade and logistics costs fostered global value chains in which firms could source, produce, and distribute on a worldwide scale. At the same time, technological advances — from automation to large-scale IT systems — shifted production towards high fixed costs and low variable costs.
Either force alone would have created substantial scale economies. Together, they produced a structural shift towards business models in which firms had to spread large, fixed costs across large markets in order to remain competitive. This naturally generated higher variable profit margins. But only firms capable of scaling — those with productivity advantages or specialised intangible assets — could fully exploit these gains.
Reallocation of market share toward more efficient firms fits the classic Schumpeterian account of creative destruction. But this process was also shaped by strategic investments in branding, marketing, and other intangible activities whose welfare implications are more ambiguous than those of technological innovation or free trade.
Consolidation in many industries further reinforced the advantages of incumbency, sometimes justified as a response to perceived market power elsewhere in supply chains. Whatever the rationale, the result was a market structure in which dominance limited the extent to which falling costs were passed through to consumers.
The missing entrants
In a textbook setting, high margins should attract new competitors. Instead, business dynamism has waned. The same forces that created scale economies also raised barriers to entry: large upfront investment requirements, the central role of data and software, and network effects that reward early movers.
Market power, inflation, and inequality
The traditional role of antitrust policy has been to protect consumers from abuse of market power that leads to high prices. A central challenge today is that it is often difficult to argue that the new business models of recent decades have harmed consumers. Until 2021, inflation remained low, and the combination of global trade and technological advances consistently pushed prices down.
The key to understanding this pattern is that profit margins reflect the difference between prices and variable costs. Profit margins rose not because firms raised prices, but because variable costs fell — and those cost reductions were only partially passed through to consumers. Two examples illustrate this mechanism.
In our work on India’s early-1990s trade liberalisation (De Loecker et al 2016), we show that tariff cuts on intermediate inputs lowered producers’ costs, reduced consumer prices, and simultaneously increased firms’ profit margins. Because cost savings were not fully passed through, firms captured part of the gains. We also found suggestive evidence that these higher profits helped finance product innovation.
This appears to be a win-win story: consumers benefit from lower prices, firms benefit from higher profits, and innovation accelerates. The problem arises only when one worries about relative standing — specifically, the shifting balance of power between global firms and the rest of the economy, which can have political repercussions.
A second example comes from Zara, one of the world’s most profitable clothing retailers. Zara offers affordable apparel while enjoying high margins because its variable costs are extremely low, relying on several suppliers — especially labour — in low-wage countries. Again, consumers benefit from low prices, the firm benefits from high profits, and suppliers in poorer economies gain access to global markets that can help spur development.
The concern, however, echoes the first example: rising inequality between highly productive global firms and the rest of the economy, and between top earners and displaced workers in advanced countries.
As vested interests increasingly shape the debate, the value of a clearer understanding of how globalisation, technology, regulation and financial markets jointly shape competitive outcomes is essential. Only then can policy respond effectively to the economic and political pressures created by concentrated economic power
Competition, concentration, and innovation
A frequent claim, particularly in Europe, is that high US concentration, supported by weak antitrust enforcement, has undermined American innovation. Yet this view sits uneasily with the evidence. The US remains far more dynamic than Europe – for instance, it is the birthplace of the current wave of artificial intelligence technologies.
Notably, the key breakthrough came not from an incumbent giant but from OpenAI — then a small, non-profit entrant — building on ideas developed, but not commercialised, inside Google. The fact that an upstart could scale rapidly in the US ecosystem suggests that high concentration and intense rivalry can coexist.
Today a handful of large players dominate AI, but competition among them is fierce. Meta’s willingness to recruit aggressively from OpenAI highlights how rivalry within concentrated sectors can remain vigorous. Against this backdrop, explanations for Europe’s technological underperformance must extend beyond the simple question of antitrust stringency.
Beyond big tech: the rising concentration elsewhere
Public debate focuses heavily on large technology platforms, but consolidation extends far beyond Silicon Valley. Business-to-business markets, pharmaceuticals, healthcare services, and education have all experienced marked increases in concentration. These sectors attract less attention yet hold considerable economic weight and warrant greater scrutiny.
The role of financial markets
An underappreciated factor in transatlantic comparisons is the structure of US capital markets. American equity markets have assigned exceptionally high valuations to domestic firms, giving them both the currency and the confidence to acquire European start-ups before they mature into independent competitors. DeepMind, Skype, and Shazam are classic examples: each began as a European success story but was ultimately absorbed by a US tech giant rather than evolving into a homegrown global champion.
The ‘Buffett indicator’, which compares total stock market capitalisation to economic output, has climbed from around 50% in 1980 to roughly 200% today. These valuations reflect market depth, investor appetite and regulatory differences — not weak competition policy — but they shape competitive outcomes all the same.
The role of antitrust
Competition authorities are often cast as the villains of the story. But while enforcement mistakes are inevitable, it is difficult to argue that antitrust alone explains today’s market structures. Agencies in the US and Europe have operated under significant resource constraints, often facing firms with far greater financial and legal capacity.
More importantly, many features of modern production — economies of scale, network effects, and data advantages — create concentrated market structures even in the presence of active enforcement.
Market power also emerges from the interaction of many well-intentioned policies. Trade liberalisation without strong domestic competition can leave economies with fewer, larger firms. Regulatory interventions can inadvertently raise entry barriers. Financial market structures can amplify incumbency advantages. In such a world, simple narratives — whether blaming globalisation, technology, or antitrust — fail to capture the underlying complexity.
These challenges do not diminish the need for antitrust. If anything, its importance is increasing. With many industries now dominated by a small number of firms, vigilant oversight of mergers, acquisitions, and exclusionary conduct is essential.
The rise of digital technologies and algorithmic systems raises the minimum efficient scale for entry even further. Regulatory frameworks—from licensing requirements to compliance burdens—can unintentionally entrench incumbents and should be scrutinised with this risk in mind.
The way forward
Economic policy now stands at a critical juncture. Policymakers must recognise the trade-offs inherent in promoting scale, innovation, and competition simultaneously. They must also acknowledge that many concerns attributed to competition policy—from labour market pressures to rising inequality — lie outside traditional antitrust mandates and are best addressed through different tools.
As vested interests increasingly shape the debate, the value of a clearer understanding of how globalisation, technology, regulation and financial markets jointly shape competitive outcomes is essential. Only then can policy respond effectively to the economic and political pressures created by concentrated economic power.
References
Autor, D, D Dorn, L Katz, C Patterson and J Van Reenen (2020), “The Fall of the Labor Share and the Rise of Superstar Firms”, The Quarterly Journal of Economics 135(2).
De Loecker, J and J Eeckhout (2020), “The Rise of Market Power and the Macroeconomic Implications”, The Quarterly Journal of Economics 135(2).
De Loecker, J and J Eeckhout (2025), “The Macroeconomics of Market Power”, Annual Review of Economics, forthcoming.
De Loecker, J, P Goldberg, A Khandelwal and N Pavcnik (2016), “Prices, Markups and Trade Reform”, Econometrica 84(2): 445-510.
This article was originally published on VoxEU.org.
