COUNCIL OF ECONOMIC ADVISERS ISSUE BRIEF
This issue brief describes the ways in which
competition between firms can benefit consumers, workers, entrepreneurs, small
businesses and the economy more generally, and also describes how these
benefits can be lost when competition is impaired by firms’ actions or
government policies.
Several indicators suggest that competition may be
decreasing in many economic sectors, including the decades-long decline in new
business formation and increases in industry-specific measures of
concentration.
Recent data also show that returns may have risen for
the most profitable firms. To the extent that profit rates exceed firms’ cost
of capital— which may be suggested by the rising spread on the return to
invested capital relative to Treasury bonds— they may reflect economic rents,
which are returns to the factors of production in excess of what would be
necessary to keep them in operation.
Such rents may divert resources from consumers,
distort investment and employment decisions, and encourage firms to engage in
wasteful rent-seeking activities.
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