Explainers

Entrepreneurship and Monopoly


Since the founding, Americans have viewed entrepreneurship as a way to secure our nation’s political freedom. Thomas Jefferson’s celebrated the civic virtue of “yeoman farmers.”  Since then a long line of American political thinkers have seen independent, small-scale business and property owners as guarantors of a vibrant democracy.

Americans also know that new business ventures are essential to economic progress and upward mobility. New enterprises, whether local pharmacies or tech startups, help Americans build assets that can fund a retirement or be passed on to future generations. Even more, startups help create an inclusive economy. They provide opportunities for women and minorities to more quickly achieve financial success and leadership than in larger firms.

New enterprises also are responsible for high rates of job-creation and innovation. According to the U.S. Small Business Administration, small firms employ over half of the private-sector workforce and created nearly two-thirds of the nation’s net jobs over the past fifteen years. Large firms generated 1.7 patents per hundred employees, whereas small firms generated an impressive 26.5 patents per employee.

Yet while entrepreneurship is essential to the American Dream, over the past thirty years the rate of new business formation has declined. The number of companies less than a year old, as a share of all businesses, dropped by 44 percent between 1978 and 2012. In all 50 states, the number of firm exits has outpaced new firm formation.

Experts point to many causes, none of which provides a full explanation. One line of thinking is that less access to bank lending makes it harder for business owners to sustain and finance new ventures.  Yet the emergence of “fintech” and crowdfunding campaigns often has the opposite effect.

Similarly, overly broad regulations can hamstring new startups. But new regulations, such as mandates for the use of renewable energy to reduce pollution, also create new markets for entrepreneurs. New technologies sometimes reduce competition by raising the amount of capital and expertise needed to start a new business, Yet there are also many examples in which digital technologies have dramatically lowered the costs of starting a new business. E-commerce, for example, reduces the need for investment in brick and mortar stores.

Another less discussed cause is a set of legislative changes that have weakened anti-monopoly laws over the past thirty years. These shifts have yielded a more concentrated economy, with less dynamic, incumbent firms replacing more innovative startups.

Market concentration harms new business formation in many ways.  For example, when monopolistic firms learn of new entrants, they can engage in loss-leading. Instead of competing on quality or convenience, they use their market power to sell their product below cost to drive out their new competitors.

Similarly, well-established firms in concentrated industries can collude with each other to fix prices and production levels. These anticompetitive actions squeeze enterprising suppliers and prevent them from competing with incumbent firms. Even without collusion, concentrated industries often make it much harder for newcomers to break in by exploiting their purchasing power over suppliers.

Recent years also have seen the emergence of platform monopolies that increasingly suppress new business formation by competing with and exploiting the businesses that use these platforms. For example, Amazon, which provides a marketplace for third-party sellers, not only competes with these sellers on the same platform (not least by exploiting its ability to monitor these sellers’ sales data), but also keeps a 15 to 50 percent cut of each sale its competitors on the platform make.

Platform monopolies like Google and Facebook also suppress competition from smaller businesses and upstarts. As these firms erode the economic foundation of traditional media outlets by appropriating their editorial content and advertising revenues, independent business owners find they must pay a “platform tax” to Google and Facebook to reach potential customers. Currently, Google and Facebook control half of all global advertising revenue.

Throughout the early 20th century, two sets of policies avoided these conditions and sustained open and competitive marketplaces. One type were called “fair trade” laws. The Robinson-Patman Act for instance, prohibited the practice of selling an item below cost to drive a competitor out of business. Another, the Miller-Tydings Act set a floor on how inexpensively big retailers could sell their products. Specifically, the legislation ensured that competition among retailers would involve more than just price discounting.

Strong antitrust enforcement also ensured a competitive economy. Government officials understood that concentrated industries made it harder for new businesses to gain entry to a market. As a result, they banned mergers that would increase the size of incumbents.

However, by the mid-1970s, a bipartisan group of politicians worked to repeal these policies. The Consumer Goods Pricing Act of 1975 overturned the Miller-Tydings Act of 1937, and led to the end of most “fair trade” laws. In the early 1980s, the Reagan Administration’s Justice Department stopped enforcing the Robinson-Patman Act and re-wrote The Department of Justice’s Merger Guidelines. These changes drove consolidation among retailers, giving them tremendous power over their independent suppliers.

The effects on small business and entrepreneurship have been devastating. According to the Institute for Local Self-Reliance, between 1997 and 2012, “the number of small manufacturers fell by more 70,000, local retailers saw their ranks diminish by 108,000, and the number of community banks and credit unions dropped by half, from about 26,000 to 13,000.” During this entrepreneurial slide, the share of businesses more than 16 years old grew by 12 percent, and the share of the workforce employed in those firms rose 11 percent, to 73 percent. These effects have been particularly troubling for minority communities. The per capita number of black employers, for instance, declined by 12 percent between 1997 and 2014.

Going forward, it’s important to enforce our anti-monopoly laws and update them in the era of platform companies. Doing so will sustain the entrepreneurial energy that has secured America’s political and economic freedoms.

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In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

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