Dominant corporations have dramatically increased their market power in the U.S. over the last decades, allowing them to boost their profits and, by extension, political power. And, although rarely acknowledged by the media, this trend owes much to the way public policy has promoted corporate intellectual property rights at the public expense.
The growing concentration of market power
The first chart shows that while 109 public corporations captured half of the total profits earned by all public corporations in 1975, that number fell to just 30 by 2015. And as the second chart reveals, this growth in market concentration is reflected in other key market indicators as well, such as control over assets, cash flow, and cash holdings.
A recent International Monetary Fund working paper provides additional evidence of the growth in corporate market power, highlighting the ability of leading corporations to markup their prices and increase their profit share. Defining market power as “the ability of a firm to maintain prices above marginal cost—the level that would prevail under perfect competition,” the authors of the IMF paper “estimate markups between prices and marginal costs for publicly traded firms in 33 advanced economies and 41 emerging market and developing economies from 1980-2016.” According to the authors, “this is the first study…to report firm-level markups for such a broad range of economies over such an extended period.”
The figure below shows a dramatic increase in markups by U.S. publicly listed firms, which means that U.S. firms have enjoyed growing power to push up their prices relative to their costs of production.
As the authors report:
markups of U.S. firms have increased by a sales-weighted average of 42 percent during 1980-2016. Markups increased across all major industries, and not only technology ones, with the sales-weighted average increase ranging between 7 and 137 percent for the 10 broad FTSE/Dow Jones Industrial Classification Benchmark industries available within Thomson Reuters Worldscope.
Some industry subsectors, especially those in Health Care, like Biotechnology and Pharmaceuticals, have seen extreme increases (as shown in the following figure). “The sub-sector featuring the largest increase in markups over this period (by 419 percent) is ‘Biotechnology,’ part of the ‘Health Care’ industry.”
An IMF blog post commenting on this study notes:
The growing economic wealth and power of big companies—from airlines to pharmaceuticals to high-tech companies—has raised concerns about too much concentration and market power in the hands of too few. In particular, in advanced economies, rising corporate market power has been blamed for low investment despite rising corporate profits, declining business dynamism, weak productivity, and a falling share of income paid to workers.
The role of public policy in promoting market concentration, profits, and power
Public policy, in particular, government efforts to promote and protect corporate intellectual property rights (e.g. patents and copyrights), is one reason for the trend in market concentration. As Dean Baker, co-director of the Center for Economic and Policy Research, explains:
Patents, copyrights, and other forms of intellectual property are public policy. They are not facts given to us by the world or the structure of technology somehow. While this point should be self-evident, it is rarely noted in discussions of inequality or ways to address it.[And] there is an enormous amount of money at stake with intellectual property rules. Many items that sell at high prices as a result of patent or copyright protection would be free or nearly free in the absence of these government granted monopolies. Perhaps the most notable example is prescription drugs where we will spend over $420 billion in 2018 in the United States for drugs that would almost certainly cost less than $105 billion in a free market. The difference is $315 billion annually or 1.6 percent of GDP. If we add in software, medical equipment, pesticides, fertilizer, and other areas where these protections account for a large percentage of the cost, the gap between protected prices and free market prices likely approaches $1 trillion annually, a sum that is more than 60 percent of after-tax corporate profits.
The U.S. patent system has helped boost the monopoly power of many of the country’s most profitable firms in numerous ways. For example, the government has increased the duration of both patents and copyrights. Even more importantly, the government has steadily expanded the scope of what can be patented to “include biological organisms, software, and business methods.” This expansion has enabled corporations to lockup an ever-growing number of products and processes, and force other companies to pay them for their use.
U.S. laws also generally privilege patent and copyright holders when it comes to challenges. For example, a company that feels its copyright is being infringed can sue not only to reclaim lost royalty payments but also for damages, which can greatly increase the financial stakes. In addition, the government often prosecutes copyright cases criminally, turning a possibly small financial violation into a potentially major criminal offense.
Baker offers another example of the one-sided nature of the U.S. intellectual property rights regime:
the Digital Millennial Copyright Act of 1998 holds third parties potentially liable for infringement. In order to protect themselves from liability, a web intermediary has the responsibility for promptly taking down allegedly infringing material after being notified. This effectively requires an intermediary to take the side of the person alleging infringement against their customer or friend. By contrast, the law in Canada simply requires that the intermediary notify the person posting the alleged infringing material, after which point they have ended their potential liability.
Perhaps even more revealing of the pro-corporate nature of government policy is the fact that government spending has often financed the innovations that private firms then patent and benefit from. Considering prescription drugs again, the U.S. National Institutes of Health spends approximately $37 billion a year on biomedical research. Other government agencies, such as the Centers for Disease Control, spend smaller but still significant amounts. But, following the passage of the Boyh-Dale act in December 1980, the government, as Baker explains, has allowed “researchers on government contracts to gain ownership rights to their research. This meant they could get patents or other types of protection on work for which the government incurred much or all of the cost. While Bayh–Dole applied to all types of research supported by the government it had the largest impact on the market for prescription drugs.”
Paris Marx offers another example of this public subsidization of private profit-making, noting the ways public research provided key discoveries that made possible the success of the iphone:
Steve Jobs may have been a genius—he certainly had an eye for design—but his most successful product would not exist if it weren’t for the billions of dollars that the U.S. government spends every year on research and development. The best accounting of this has been done by Mariana Mazzucato, author of “The Entrepreneurial State,” who skillfully explains that touch-screen displays, GPS, the Internet and even Siri were the product of public research funding—features the iPhone wouldn’t be very compelling without.
And that’s not to say that Apple should get no credit for the revolutionary product it created. The company assembled those technologies in a compelling package and has developed many of its own innovations to enhance it along the way. But that doesn’t change the fact that the fundamentals wouldn’t exist without the government.
And here is yet another example from Mazzucato:
we continue to romanticize private actors in innovative industries, ignoring their dependence on the products of public investment. Elon Musk, for example, has not only received over $5 billion in subsidies from the U.S. government; his companies, SpaceX and Tesla, have been built on the work of NASA and the Department of Energy, respectively.
Recognizing the value of strong private industry-protecting intellectual property rights, leading corporations have been pushing their respective governments to demand tougher rights as part of new trade agreements, making this a global problem. Here is what the United Nations Conference on Trade and Development has to say:
Paradoxically, even as tangible barriers to trade imposed by governments, such as tariffs and quotas, have been declining over the last 30 years or so, intangible barriers to competition rooted in “free trade” treaties and erected by large firms themselves have surged, as they exploit the increased legal protection of intellectual property and the broadening scope for intangible intra-firm trade. According to some estimates, intangible assets may represent up to two thirds of the value of large firms.…
Returns to knowledge-intensive intangible assets proxied by charges for the use of foreign IPR rose almost unabated throughout the [global financial crisis] and its aftermath, even as returns to tangible assets declined. At the global level, charges (i.e. payments) for the use of foreign IPR rose from less than $50 billion in 1995 to $367 billion in 2015.…
The rise of intangible barriers that further distort competition, increase corporate leverage and foster monopolistic rents has been partly supported by changes to domestic laws in many countries. But international treaties may have been even more significant, such as double non-taxation agreements and new generation trade agreements that include provisions strengthening the protection of IPR, foreign investment, etc. (Trade and Development Report, 2018)
The U.S. government has been one of the most aggressive governments pushing this international expansion of restrictive intellectual property rights. The recently negotiated U.S.-Mexico-Canada agreement is, as Peter Dolack describes, a prime example:
It appears that corporate wish lists for intellectual property, financial services and other areas were largely granted. New IP rules, if this agreement is passed into law, include stepped-up enforcement against “camcording of movies” and “cable signal theft,” as well as “Broad protection against trade secret theft.”
The IP rules would extend copyrights to 75 years, long a U.S. demand (and one opposed by the Canadian government); increase pressure on Internet service providers to take works alleged to infringe copyrights (in actuality a tool for censorship); and provide for “strong protection for pharmaceutical and agricultural innovators,” which can be presumed to be code for enabling further medicine price-gouging and crimping accessibility to generic and cheaper alternatives. The last of these was a prominent U.S. goal for the Trans-Pacific Partnership, which, inter alia, sought to eliminate the New Zealand government’s program to provide medicines in bulk at discounted prices at the behest of U.S. pharmaceutical companies. Related to this is a measure to include 10 years’ protection for biologic drugs and an expansion of products eligible for “protection.”
We need a different public policy
In short, it appears that the existing IPR regime has largely helped to promote monopoly power, higher prices, and greater inequality, and at the public expense. We need a new policy, and, setting aside the daunting political obstacles to change, it is easy to see possibilities for a different and more publicly spirited policy.
For example, we could reduce both the scope of what is patentable as well as the length of patents, thereby weakening monopoly power and promoting lower prices. And likely at little “economic” cost. Patents and copyrights are supposed to encourage innovation and productivity gains. Yet, as Baker notes:
A cross-country analysis assessing the impact of stronger protections on productivity growth found no evidence of a positive relationship. In fact, most of the regressions found a negative relationship between patent strength and productivity growth. Similarly, an analysis that looked at multi-factor productivity growth across industries found no relationship between the number of patents issued and the rate of productivity growth.
And we could also end the government’s direct subsidization of privately patented products. For example, the government could boost its funding of health research though long-term contracts with drug and other health related businesses, with the requirement “that all research findings and patents are placed in the public domain. An advantage of [this] approach is that all research findings would be available for both clinicians and other researchers.” The public gains from a change in policy, especially in the health field, would likely be enormous.
In sum, we need to go beyond bemoaning current trends, which impoverish us in a variety of ways. Rather, we need to press for an end to the existing public policies that encourage them and for the development of a new intellectual property rights regime that actually serves the public interest.