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Some Context on the Executive Order on Promoting Competition in the American Economy
Economists love talking about competitive markets, but markets aren’t typically competitive. In the traditional textbook sense of the term, competitive markets involve a bunch of small, identical firms that don’t have any excess profits. This isn’t exactly anything most entrepreneurs strive for when they set up a business. Markets can be seen in relative terms as more competitive or less competitive, but they can probably never be a form of pure competition. The emphasis on competitive markets when competitive markets don’t really exist is only a small part of the motivation that some economists have for rewriting the entire curriculum, but that’s a topic for another newsletter.
Business owners develop a variety of strategies to increase their market share and earn excess profits above their competitors. This behavior isn’t always a bad thing since part of these strategies involves expanding to new locations or developing entirely new products. These strategies cause firms to become more profitable, but they could also cause society, as a whole, to become worse off relative to a competitive market. It would be nice to have lots of firms competing with each other, but sometimes a market controlled by one firm is better than no market at all.
The problem occurs when there are a few competing businesses, but they are doing things that don’t involve innovative new products or expansion into unserved areas. When firms start gaining market power without most customers being served, it catches the eyes of regulators. You may have heard a couple of weeks ago that President Biden issued an Executive Order on Promoting Competition in the American Economy. This order focused on limiting some of the market power firms have developed over the past couple of decades:
While exploitation is a great talking point for a politician, economists would more likely call this economic rent. In truly competitive markets (remember, these don’t really exist), items are sold at a price that is the same as the cost of producing the last item sold. When prices are set above this level, however, firms are earning economic rent. If prices are “too high” above this level, that’s when regulators consider intervention. The problem? Who gets to determine when prices are “too high”? Business owners believe they’re being compensated for the risk they took in starting the business. Consumers believe they’re being exploited. In more competitive environments, customers can choose who to shop with, but their options decrease as markets become more concentrated.
Antitrust legislation was designed to protect consumers and ensure that prices were reasonable. With this latest executive order, the Biden Administration appears to be targeting three key industries (agriculture, airlines, pharmaceuticals) that they believe have gotten too powerful. There are additional industries they’re targeting as well, but these three appear to be at the forefront of their focus. Effective regulation would mean lower prices for consumers via fewer fees and more competitors. Alternatively, it might also mean fewer fringe perks that some consumers have previously paid for in the past.
A second important component of the new executive order focuses on the other side of the market as well: labor markets. When firms have “too much” power over workers, the labor markets are said to be monopsonistic. The term was coined by Joan Robinson in the early 1900s, but the concept has garnered a lot of attention over the past decade. Instead of creating innovative new products, some industries have opted to enact policies aimed at reducing the cost of hiring workers. The new Executive Order looks to limit/ban a growing number of practices that made it hard for workers to quit and find a new job, like noncompetes clauses, unnecessary occupational licenses, and sharing of salaries between firms. When workers can’t easily find new jobs, it reduces their bargaining power and makes it so firms can pay less than the “market” wage. Typically these sorts of things were part of collective bargaining agreements issued by unions, but as the share of workers who are unionized is at a record low, this Executive Order intends to correct this issue.
Ioana Marinescu, an economist at the University of Pennsylvania, analyzed data on 8,000 specific labor markets with two co-authors and found that when a job market was heavily concentrated among a few employers, it resulted in a 5 percent to 17 percent decline in wages. (New York Times)
Will any of these new policies actually have the intended effect that regulators believe it will? Businesses will respond in ways that favor their bottom lines, but will it actually improve market conditions? One of the key takeaways I want my students to realize is that firms will always try to find ways to avoid unprofitable legislation. The result is that some workers/customers will still receive benefits, but others will not. From a policy standpoint, it’s worth trying to figure out if the gains to the people who benefit offset the losses to the people who don’t.
My favorite example to give students is the 2010 healthcare law that required large employers to offer healthcare to full-time workers, which the law set at 30 hours per week. Based on data from the Current Population Survey, it appeared that firms started reducing the number of employees who worked between 31 and 34 hours and increased the number of employees working under 30 hours. While it may not have changed the hours for people who were working full time, it likely had a small impact on the people right near the cutoff.
The overall number of workers impacted was relatively small and a large number of workers likely gained from the policy. The same will probably be true from this executive order. You can likely predict what will happen with the regulations targeting the airline industry. One of the proposals is that customers should be refunded fees if their bags are delayed or if the plane’s wifi isn’t working. One result might be that airlines stop offering wifi altogether on flights or they may no longer offer free checked bags to some customers in order to offset potential losses from refunds they’ll eventually need to issue. It’s unlikely that airlines will upgrade their wifi reliability or improve their baggage handling process. While some people will benefit from the new proposal (people who have delayed bags), others may face increased costs or reduced services. Only time will tell!
If you’d like to learn more about Joan Robinson, check out this great podcast by Economics in Ten. If you have a favorite economist, I’d love to learn more about them! If you have seen dumb rules/regulations that have made it harder for you to get a job, please leave a comment, and we can commiserate together.
There were 31,447 bachelors degrees in economics awarded in 2019 [Journal of Economics Education]
President Biden has issued 52 Executive Orders so far in his presidency [UC Santa Barbara]
U.S. airlines collected almost $6 billion in baggage fees in 2019 [Reuters]
In 2020, 10.8% of wage and salary workers were part of a union [Bureau of Labor Statistics]
Week 29 is in the books and I’ve checked in a total of 42 books for the year. Last week I shared that I was reading the latest book in the Maggie Hope series and it did NOT disappoint! In this book, Maggie heads to Hollywood to fight Nazis and the KKK! It was really interesting reading this book at the same time that I’m also in the middle of America for Americans, which looks at the history of xenophobia in America. I did learn about a famous race riot that occurred in a neighboring city, but I had never known about it before: