A British Conservative proposes the worst idea in competition policy yet

When you get the facts and the theory wrong, bad policy conclusions are likely to follow.

By Brian Albrecht. Excerpts:

"UK Member of Parliament (former Conservative Party Cabinet Minister) Kit Malthouse published an essay in CapX earlier this month titled “We need a competition revolution.”"

"Malthouse paints a dire picture of rampant monopolization across British industries: “we see the same pattern: a handful of dominant firms controlling vast swathes of the economy, shutting out competition and stifling innovation.”

Malthouse’s argument suffers from two fundamental problems: it is wrong on the evidence, and it is wrong on the economy theory."

"the Herfindahl-Hirschman Index (HHI), the most comprehensive measure of market concentration, has barely changed over the last 25 years. It increased slightly from around 1,100 in 1997 to 1,300 during its peak, before falling back to just above 1,100 by 2022."  

"The timing matters: “Across a range of measures, concentration increased during the mid-late 2000s, then fell slightly. The latest data (2022) shows that it stands at similar levels to 1997.” The dates are worth noting, as the UK productivity slowdown (as in the United States) started around 2006. Thus, concentration has been falling during the productivity slowdown that is plaguing the country."

"The mean-concentration ratio of the top five UK firms only increased from 43% to 47% over the last quarter century—hardly the dramatic consolidation that Malthouse describes."

"You could say that 43% was still problematic, and the economy suffered from the same problem in 1997. Unfortunately, that would mean that none of Malthouse’s explanations work. His entire essay frames market concentration as a recent and worsening crisis"

"if concentration levels in 2022 are virtually identical to 1997, then this narrative of recent capture by “corporate titans” and his historical arc of declining competition collapses. The problem either existed in the late 1990s (negating his claims about recent regulatory failure) or doesn’t exist now to the degree he claims at all."

"But Malthouse’s diagnosis of why this is happening—primarily due to monopolistic behavior—doesn’t necessarily follow from the data. That conclusion simply ignores much more important factors: technological changes, shifting consumer preferences, and structural economic transformations. We can see this, because the industries affected aren’t all the same."

"While Malthouse correctly notes that markups have risen, his explanation for this trend doesn’t match the evidence. He suggests this is primarily due to monopolistic exploitation, but the report finds “the technology explanation plays a more significant role in driving markup trends in the UK” than anti-competitive conduct.

The report shows significant sectoral variation in markup trends. Administrative and support services, professional/technical/scientific services, and arts and entertainment have seen rapidly rising markups. In contrast, manufacturing, construction, and accommodation/food services have experienced milder increases."

"markup increases have been “driven predominantly by firms that already have the largest markups” and that “the dispersion of markups has grown,” both of which indicate widening gaps between market leaders and followers. This suggests that certain firms may be pulling ahead not just through market power, but through superior technology, productivity, or business models—factors that might actually benefit consumers through better products and services."

"In the United States, technology seems to be the main driver, so that’d be a good starting point for the UK."

"The four industries with the most concerning markup levels are “creative arts and entertainment; temporary employment activities; information services; and the organisation of conventions and trade shows.” None of these feature prominently in Malthouse’s critique besides information services"

"Manufacturing, which he suggests is dominated by monopolies, has actually seen stable markups over the last 25 years."

"In a paper on the United States that I co-authored with Ryan Decker, we show that the industries experiencing larger increases in markups actually saw less of a decline in dynamism."

"When you plot the industry markup against different measures of dynamism, higher markups correlate with higher dynamism"