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Symposium on Markups
"Are Price-Cost Markups Rising in the United States? A Discussion of the Evidence," by Susanto Basu
A number of recent papers have argued that US firms exert increasing market power, as measured by their markups of price over marginal cost. I review three of the main approaches to estimating economy-wide markups and show that all are based on the hypothesis of firm cost minimization. Yet different assumptions and methods of implementation lead to quite different conclusions regarding the levels and trends of markups. I survey the literature critically and argue that some of the startling findings of steeply rising markups are difficult to reconcile with other evidence and with aggregate data. Existing methods cannot determine whether markups have been stable or whether they have risen modestly over the past several decades. Even relatively small increases in markups are consistent with significant changes in aggregate outcomes, such as the observed decline in labor's share of national income.
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"Macroeconomics and Market Power: Context, Implications, and Open Questions," by Chad Syverson
This article assesses several aspects of recent macroeconomic market power research. These include the ways market power is defined and measured; the use of accounting data to estimate markups; the quantitative implications of theoretical connections among markups, prices, costs, scale elasticities, and profits; and conflicting evidence on whether greater market power has led to lower investment rates and a lower labor share of income. Throughout this discussion, I characterize the congruencies and incongruencies between macro evidence and micro views of market power and, when they do not perfectly overlap, explain the open questions that need to be answered to make the connection complete.
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"Do Increasing Markups Matter? Lessons from Empirical Industrial Organization," by Steven Berry, Martin Gaynor and Fiona Scott Morton
This article considers the recent literature on firm markups in light of both new and classic work in the field of industrial organization. We detail the shortcomings of papers that rely on discredited approaches from the "structure-conduct-performance" literature. In contrast, papers based on production function estimation have made useful progress in measuring broad trends in markups. However, industries are so heterogeneous that careful industry-specific studies are also required, and sorely needed. Examples of such studies illustrate differing explanations for rising markups, including endogenous increases in fixed costs associated with lower marginal costs. In some industries there is evidence of price increases driven by mergers. To fully understand markups, we must eventually recover the key economic primitives of demand, marginal cost, and fixed and sunk costs. We end by discussing the various aspects of antitrust enforcement that may be of increasing importance regardless of the cause of increased markups.
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Symposium on Issues in Antitrust
"Protecting Competition in the American Economy: Merger Control, Tech Titans, Labor Markets," by Carl Shapiro
Accumulating evidence points to the need for more vigorous antitrust enforcement in the United States in three areas. First, stricter merger control is warranted in an economy where large, highly efficient and profitable "superstar" firms account for an increasing share of economic activity. Evidence from merger retrospectives further supports the conclusion that stricter merger control is needed. Second, greater vigilance is needed to prevent dominant firms, including the tech titans, from engaging in exclusionary conduct. The systematic shrinking of the scope of the Sherman Act by the Supreme Court over the past 40 years may make this difficult. Third, greater antitrust scrutiny should be given to the monopsony power of employers in labor markets.
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"The Problem of Bigness: From Standard Oil to Google," by Naomi R. Lamoreaux
This article sets recent expressions of alarm about the monopoly power of technology giants such as Google and Amazon in the long history of Americans' response to big business. I argue that we cannot understand that history unless we realize that Americans have always been concerned about the political and economic dangers of bigness, not just the threat of high prices. The problem policymakers faced after the rise of Standard Oil was how to protect society against those dangers without punishing firms that grew large because they were innovative. The antitrust regime put in place in the early twentieth century managed this balancing act by focusing on large firms' conduct toward competitors and banning practices that were anticompetitive or exclusionary. Maintaining this balance was difficult, however, and it gave way over time—first to a preoccupation with market power during the post–World War II period, and then to a fixation on consumer welfare in the late twentieth century. Refocusing policy on large firms' conduct would do much to address current fears about bigness without penalizing firms whose market power comes from innovation.
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Articles
"How Market Design Emerged from Game Theory: A Mutual Interview," by Alvin E. Roth and Robert B. Wilson
We interview each other about how game theory and mechanism design evolved into practical market design. When we learned game theory, games were modeled either in terms of the strategies available to the players ("noncooperative games") or the outcomes attainable by coalitions ("cooperative games"), and these were viewed as models for different kinds of games. The model itself was viewed as a mathematical object that could be examined in its entirety. Market design, however, has come to view these models as complementary approaches for examining different ways marketplaces operate within their economic environment. Because that environment can be complex, there will be unobservable aspects of the game. Mathematical models themselves play a less heroic, stand-alone role in market design than in the theoretical mechanism design literature. Other kinds of investigation, communication, and persuasion are important in crafting a workable design and helping it to be adopted, implemented, maintained, and adapted.
Full-Text Access | Supplementary Materials
"A Bridge from Monty Hall to the Hot Hand: The Principle of Restricted Choice," by Joshua B. Miller and Adam Sanjurjo
We show how classic conditional probability puzzles, such as the Monty Hall problem, are intimately related to the recently discovered hot hand selection bias. We explain the connection by way of the principle of restricted choice, an intuitive inferential rule from the card game bridge, which we show is naturally quantified as the updating factor in the odds form of Bayes's rule. We illustrate how, just as the experimental subject fails to use available information to update correctly when choosing a door in the Monty Hall problem, researchers may neglect analogous information when designing experiments, analyzing data, and interpreting results.
Full-Text Access | Supplementary Materials
"A Toolkit of Policies to Promote Innovation," by Nicholas Bloom, John Van Reenen and Heidi Williams
Economic theory suggests that market economies are likely to underprovide innovation because of the public good nature of knowledge. Empirical evidence from the United States and other advanced economies supports this idea. We summarize the pros and cons of different policy instruments for promoting innovation and provide a basic "toolkit" describing which policies are most effective according to our reading of the evidence. In the short run, R&D tax credits and direct public funding seem the most productive, but in the longer run, increasing the supply of human capital (for example, relaxing immigration rules or expanding university STEM admissions) is likely more effective.
Full-Text Access | Supplementary Materials
"How Prevalent Is Downward Rigidity in Nominal Wages? International Evidence from Payroll Records and Pay Slips," by Michael W. L. Elsby and Gary Solon
For more than 80 years, many macroeconomic analyses have been premised on the assumption that workers' nominal wage rates cannot be cut. Contrary evidence from household surveys reasonably has been discounted on the grounds that the measurement of frequent wage cuts might be an artifact of reporting error. This article summarizes a more recent wave of studies based on more accurate wage data from payroll records and pay slips. By and large, these studies indicate that, except in extreme circumstances (when nominal wage cuts are either legally prohibited or rendered beside the point by very high inflation), nominal wage cuts from one year to the next appear quite common, typically affecting 15–25 percent of job stayers in periods of low inflation.
Full-Text Access | Supplementary Materials
"Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence," by Hunt Allcott, Benjamin B. Lockwood and Dmitry Taubinsky
Taxes on sugar-sweetened beverages are growing in popularity and have generated an active public debate. Are they a good idea? If so, how high should they be? Are such taxes regressive? People in the United States and some other countries consume remarkable quantities of sugar-sweetened beverages, and the evidence suggests that this generates significant health costs. Building on recent work, we review the basic economic principles that determine the socially optimal sugar-sweetened beverage tax. The optimal tax depends on (1) externalities, or uninternalized health system costs from diseases caused by sugary drink consumption; (2) internalities, or costs consumers impose on themselves by consuming too many sugary drinks due to poor nutrition knowledge and/or lack of self-control; and (3) regressivity, or how much the financial burden and the internality benefits from the tax fall on the poor. We summarize the empirical evidence about the key parameters that determine how large the tax should be. Our calculations suggest that sugar-sweetened beverage taxes are welfare enhancing and indeed that the optimal sugar-sweetened beverage tax rate may be higher than the 1 cent per ounce rate most commonly used in US cities. We end with seven concrete suggestions for policymakers considering a sugar-sweetened beverage tax.
Full-Text Access | Supplementary Materials
Features
"Retrospectives: Lord Keynes and Mr. Say: A Proximity of Ideas," by Alain Béraud and Guy Numa
Since the publication of Keynes's General Theory of Employment, Interest and Money, generations of economists have been led to believe that Say was Keynes's ultimate nemesis. By means of textual and contextual analysis, we show that Keynes and Say held similar views on several key issues, such as the possibility of aggregate-demand deficiency, the role of money in the economy, and government intervention. Our conclusion is that there are enough similarities to call into question the idea that Keynes's views were antithetical to Say's. The irony is that Keynes was not aware of these similarities. Our study sheds new light on the interpretation of Keynes's work and on his criticism of classical political economy. Moreover, it suggests that some policy implications of demand-side and supply-side frameworks overlap. Finally, the study underlines the importance of a thorough analysis of the primary sources to fully grasp the substance of Say's message.
Full-Text Access | Supplementary Materials
"Some Journal of Economic Perspectives Articles Recommended for Classroom Use," by Timothy Taylor
In 2018, the editors of the Journal of Economic Perspectives invited faculty to send us examples of JEP articles that they had found useful for teaching. We received 250 responses. On the JEP website, we have created a landing page (https://www.aeaweb.org/journals/jep/classroom) that organizes the recommended articles into 33 categories. If you click on any of the categories at that link, you will see a list of JEP papers that were recommended by faculty members for classroom use for that category, presented in reverse date order. Each paper is listed with a hyperlink to its article page on the JEP website. In this article, I offer some thoughts about how this exercise was carried out, along with its strengths and weaknesses. Although we make no pretense of presenting a complete syllabus for any specific course, we offer the milder hope that these recommendations from peers might suggest some additional readings for your students.
Full-Text Access | Supplementary Materials
"Recommendations for Further Reading," by Timothy Taylor
Full-Text Access | Supplementary Materials
"How Market Design Emerged from Game Theory: A Mutual Interview," by Alvin E. Roth and Robert B. Wilson
We interview each other about how game theory and mechanism design evolved into practical market design. When we learned game theory, games were modeled either in terms of the strategies available to the players ("noncooperative games") or the outcomes attainable by coalitions ("cooperative games"), and these were viewed as models for different kinds of games. The model itself was viewed as a mathematical object that could be examined in its entirety. Market design, however, has come to view these models as complementary approaches for examining different ways marketplaces operate within their economic environment. Because that environment can be complex, there will be unobservable aspects of the game. Mathematical models themselves play a less heroic, stand-alone role in market design than in the theoretical mechanism design literature. Other kinds of investigation, communication, and persuasion are important in crafting a workable design and helping it to be adopted, implemented, maintained, and adapted.
Full-Text Access | Supplementary Materials
"A Bridge from Monty Hall to the Hot Hand: The Principle of Restricted Choice," by Joshua B. Miller and Adam Sanjurjo
We show how classic conditional probability puzzles, such as the Monty Hall problem, are intimately related to the recently discovered hot hand selection bias. We explain the connection by way of the principle of restricted choice, an intuitive inferential rule from the card game bridge, which we show is naturally quantified as the updating factor in the odds form of Bayes's rule. We illustrate how, just as the experimental subject fails to use available information to update correctly when choosing a door in the Monty Hall problem, researchers may neglect analogous information when designing experiments, analyzing data, and interpreting results.
Full-Text Access | Supplementary Materials
"A Toolkit of Policies to Promote Innovation," by Nicholas Bloom, John Van Reenen and Heidi Williams
Economic theory suggests that market economies are likely to underprovide innovation because of the public good nature of knowledge. Empirical evidence from the United States and other advanced economies supports this idea. We summarize the pros and cons of different policy instruments for promoting innovation and provide a basic "toolkit" describing which policies are most effective according to our reading of the evidence. In the short run, R&D tax credits and direct public funding seem the most productive, but in the longer run, increasing the supply of human capital (for example, relaxing immigration rules or expanding university STEM admissions) is likely more effective.
Full-Text Access | Supplementary Materials
"How Prevalent Is Downward Rigidity in Nominal Wages? International Evidence from Payroll Records and Pay Slips," by Michael W. L. Elsby and Gary Solon
For more than 80 years, many macroeconomic analyses have been premised on the assumption that workers' nominal wage rates cannot be cut. Contrary evidence from household surveys reasonably has been discounted on the grounds that the measurement of frequent wage cuts might be an artifact of reporting error. This article summarizes a more recent wave of studies based on more accurate wage data from payroll records and pay slips. By and large, these studies indicate that, except in extreme circumstances (when nominal wage cuts are either legally prohibited or rendered beside the point by very high inflation), nominal wage cuts from one year to the next appear quite common, typically affecting 15–25 percent of job stayers in periods of low inflation.
Full-Text Access | Supplementary Materials
"Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence," by Hunt Allcott, Benjamin B. Lockwood and Dmitry Taubinsky
Taxes on sugar-sweetened beverages are growing in popularity and have generated an active public debate. Are they a good idea? If so, how high should they be? Are such taxes regressive? People in the United States and some other countries consume remarkable quantities of sugar-sweetened beverages, and the evidence suggests that this generates significant health costs. Building on recent work, we review the basic economic principles that determine the socially optimal sugar-sweetened beverage tax. The optimal tax depends on (1) externalities, or uninternalized health system costs from diseases caused by sugary drink consumption; (2) internalities, or costs consumers impose on themselves by consuming too many sugary drinks due to poor nutrition knowledge and/or lack of self-control; and (3) regressivity, or how much the financial burden and the internality benefits from the tax fall on the poor. We summarize the empirical evidence about the key parameters that determine how large the tax should be. Our calculations suggest that sugar-sweetened beverage taxes are welfare enhancing and indeed that the optimal sugar-sweetened beverage tax rate may be higher than the 1 cent per ounce rate most commonly used in US cities. We end with seven concrete suggestions for policymakers considering a sugar-sweetened beverage tax.
Full-Text Access | Supplementary Materials
Features
"Retrospectives: Lord Keynes and Mr. Say: A Proximity of Ideas," by Alain Béraud and Guy Numa
Since the publication of Keynes's General Theory of Employment, Interest and Money, generations of economists have been led to believe that Say was Keynes's ultimate nemesis. By means of textual and contextual analysis, we show that Keynes and Say held similar views on several key issues, such as the possibility of aggregate-demand deficiency, the role of money in the economy, and government intervention. Our conclusion is that there are enough similarities to call into question the idea that Keynes's views were antithetical to Say's. The irony is that Keynes was not aware of these similarities. Our study sheds new light on the interpretation of Keynes's work and on his criticism of classical political economy. Moreover, it suggests that some policy implications of demand-side and supply-side frameworks overlap. Finally, the study underlines the importance of a thorough analysis of the primary sources to fully grasp the substance of Say's message.
Full-Text Access | Supplementary Materials
"Some Journal of Economic Perspectives Articles Recommended for Classroom Use," by Timothy Taylor
In 2018, the editors of the Journal of Economic Perspectives invited faculty to send us examples of JEP articles that they had found useful for teaching. We received 250 responses. On the JEP website, we have created a landing page (https://www.aeaweb.org/journals/jep/classroom) that organizes the recommended articles into 33 categories. If you click on any of the categories at that link, you will see a list of JEP papers that were recommended by faculty members for classroom use for that category, presented in reverse date order. Each paper is listed with a hyperlink to its article page on the JEP website. In this article, I offer some thoughts about how this exercise was carried out, along with its strengths and weaknesses. Although we make no pretense of presenting a complete syllabus for any specific course, we offer the milder hope that these recommendations from peers might suggest some additional readings for your students.
Full-Text Access | Supplementary Materials
"Recommendations for Further Reading," by Timothy Taylor
Full-Text Access | Supplementary Materials