Benefits of Competition and Indicators of Market Power

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.