I am referring to the new Jan De Loecker and Eeckhout paper that is starting to get some buzz (ungated versions here). Their major result, quite simply, is:

In 1980, average markups start to rise from 18% above marginal cost to 67% now.

That sounds like big news, and probably it is. But I don’t think the authors are doing enough to interpret their results. There are two ways these mark-ups go could up: first there may be more outright monopoly, second there may be more monopolistic competition, with high mark-ups but also high fixed costs, and firms earning close to zero profits. The two scenarios have very different distributional implications, and different policy implications as well.

Consider my local Chinese restaurant. Maybe the fixed cost of a restaurant has gone up, due to rising rents and the need to invest in information technology. That can mean higher fixed costs, but still a positive mark-up at the margin. The marginal meal ordered there probably is taken from food inventory, representing almost pure profit. They are happy when I walk in the door! Yet they are not getting super-rich, rather they are earning the going risk-adjusted rate of return.

Now, if the economy is moving more toward monopolistic competition, higher mark-ups don’t explain other distributional changes in the macro data, such as the decline of labor’s share, as cited by the authors.

The authors consider whether fixed costs have risen in section 3.5. They note that measured corporate profits have increased significantly, but do not consider these revisions to the data. Profits haven’t risen by nearly as much as the unmodified TED series might suggest. I do see super-high profits in firms such as Google and Facebook, however. Those companies for the most part have lowered margins compared to the status quo ex ante when the relevant service cost infinity. “Mark-ups over time” measurements become very tricky when new products are being introduced.

The authors argue that the rising value of the stock market (plus dividends) is further evidence for rising profits. Maybe, but keep in mind that the public market is less and less representative of corporate America. It also has significant survivorship bias, based on size, as superfirms are rising and the number of small and mid-sized companies listing has plummeted since the 1980s. I suspect what has really happened is that large firms are way more profitable, partly because of globalization, not because they are doing such a major rip-off of American consumers. In most areas we have more choice, maybe much more choice, than before. I would be very surprised if it turned out that most good ol’ normal mid-sized service sectors firms saw a nearly fourfold increase of the profit rate relative to gdp since 1980, as the authors are suggesting might be true for the American economy as a whole. Health care, maybe, I grant that.

Or consider old-style manufacturing. The authors report that “Markups have gone up in all industries…” This is in an environment where numerous other highly credible empirical pieces, backed also by good anecdotal observation, cite rising competition from Chinese and other global suppliers. How does that all square? I side with David Autor on that one, yet it is reported that those mark-ups, in the sectors where American business now competes with the Chinese, are rising as measured. I am worried the paper does not at all try to square this tension. Surely it means the measures are significantly wrong in some way.

Similarly, the time series for manufacturing output is a pretty straight upward series, especially once you take out the cyclical component. If there is some massive increase in monopoly power, where does the resulting output restriction show up in that data? Once you ask that simple question, the whole story just doesn’t add up.

Or ask yourself a simple question — in how many sectors of the American economy do I, as a consumer, feel that concentration has gone up and real choice has gone down? Hospitals, yes. Cable TV? Sort of, but keep in mind that program quality and choice wasn’t available at all not too long ago. What else? There are Dollar Stores, Wal-Mart, Amazon, eBay, and used goods on the internet. Government schools. Hospitals. Government. Did I mention government?

I do think concentration in the American economy is up modestly, as I argue in The Complacent Class, and probably profits are up too, including relative to gdp. Hospitals are the most significant practical problem in this regard, and again that squares with the anecdotal evidence. As it stands, I don’t yet see that this paper has established its central claim that measured rising mark-ups indicate truly higher profits in a significant way.

Addendum: The section on macroeconomic implications I think is premature (they cite the declining labor share, declining capital share, decline of low skill wages, declining LFP, declining labor market flows, declining migration rates, and slower productivity growth). They should try to calibrate this, to see if the postulated effects possibly might work out as suggested, and by the way RBC research really is useful. And timing matters too! Given the mechanisms the authors cite, what kind of timing lags are possible? It would seem for instance that when mark-ups rise, real wages fall right then and there, due to the higher prices. Is that what the data show? Do the productivity growth effects, and their weird timing with 1973 and 1995-2004 breaks, fit into the same framework? And so on. I would be very surprised if the pieces fit together in even a crude sense.

And here are remarks by Rohan Shah. I thank Alex and Robin for useful comments and discussion, of course without implicating them.