PLANET MONEY CASE STUDY: OLIGOPOLY “It’s springtime again in Washington D. C., when flowers bloom, birds chirp, and thousands of wonks from all over the world descend on the spring meetings of the International Monetary Fund and World Bank, Planet Money included. Since World War II, the IMF and World Bank have served as guardians of global capitalism. The IMF, in particular, has a long history of bailing out countries in financial crises and using its power to push a free-market agenda. That’s why we were surprised to hear IMF officials suggest capitalism is running amok.

We heard it at the wonkiest part of this wonkfest the IMF’s analytical corner. Throughout this week, IMF economists presented research on a small stage with a giant projector screen and big block letters that spelled IMF behind them. It looked sort of like a TED Talk, but the speakers weren’t wearing those cheesy Backstreet Boy headset microphones.

Wenjie Chen an economist in the IMF’s Research Department, presented the findings of an impressive study that can be found in Chapter 2 of the IMF’s World Economic Outlook. Chen gave us the sense that something fundamental in the economy has changed and that capitalism may be going haywire. The reason: companies are getting too powerful.

Why pay more?

Chen began her talk with a personal story. In 2016, Chen’s six-month-old daughter, Lily, suffered a severe allergic reaction from eating dairy. Lily is okay now, but Chen and her spouse now carry EpiPens in case Lily has another attack. The first time Chen bought the epinephrine device, she was outraged by the cost: more than $600 for a two pack. As has been widely reported, the company had raised their price by 500% since 2009.

The EpiPen pricing take provides an extreme example of what economists call a price markup, which is when a company charges a price for something that is higher than the cost of producing it. In the fairytale version of capitalism, competition takes away the power of companies to mark up their prices and forces them to sell their products at the price it costs to make them. When companies can markup their prices over this competitive level, economists say they possess market power.

Fairytale Fact Check

Chen and colleagues recently studied the price markups of a jaw-dropping number of companies - almost one million! Across 27 countries. They found that market power is growing, especially in advanced countries, where companies increased their markups by an average of 8% between 2000 and 2015. This increase in market power has occurred in a wide range of industries, from tech to pharmaceuticals to energy finance.

What is really remarkable here is that we find it’s a small fraction of firms within each industry that’s really driving this increase in market power, Chen said. These top-tier firms increased their markups by over 30% over the last couple decades.

This is about more than just consumers having to pay more at the store. The IMF’s economists connect rising market power to a range of worrisome trends in the overall economy: lackluster business investment, sluggish productivity growth, declining innovation and increasing inequality. They estimate that if price markups had remained at their 2000 levels, GDP in the average advanced country would be about one percent higher. If market power is not kept in check, these negative impacts might actually worsen, Chen warns.

Questions:

1. Name one example of a product listed that had an economic monopoly from this article.

2. Name one example of a company in this article that is part of an oligopolic market.

3. Why does having a limited number of firms in a space lead to slower economic growth?

4. List three of aye guys hat slow economic growth hurts consumers.

5. List three advantages and three disadvantages of allowing large companies to exist in a capitalistic market.