The Third Pillar: How Markets and the State Leave the Community Behind

by Raghuram G. Rajan

It is hard for researchers to tell monopoly power from efficiency since an increase in a company’s revenues for a given amount of input costs could be because the company has raised prices unduly or because it produces more, higher-quality output at the same costs. The former is a sign of monopoly, the latter a sign of productivity. At this point, it is fair to say that a mix of higher productivity and monopoly power is responsible for the higher profitability of industries that are dominated by large firms, with the importance of each explanation varying by industry.55 Health care in the United States has more monopoly and less productivity, while consumer products are the reverse. Regardless, as industry sales concentrate in a small number of firms – dubbed ‘superstar firms’ – a substantial portion of the rise in inequality of worker incomes that we discussed earlier seems to be largely because highly paid workers work at firms that pay their average worker better:

Monopoly versus efficiency for superstar firms