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Putting Profits in Perspective

The fact that some US companies are generating returns that greatly exceed historical averages has been seen by some as an indication of a weak competitive environment. But outsize profits are more likely to reflect changes wrought by the rapid digitization of the US economy.

BERKELEY – High profits are usually viewed as a sign of a company’s economic prowess, the result of innovation and efficiency forged by healthy competition. But, as a recent report by the US Council of Economic Advisers shows, high profits can have another cause: market concentration.

The report lists several indicators of decreasing competition in the US economy, including a long-term decline in new business formation and the accrual of enormous profits to a small number of firms. Acting on its recommendations, President Barack Obama recently issued an executive order calling on all US government agencies to use their authority to promote competition.

It is an important moment to assess the state of competition in various sectors. Many US industries, including some of the most innovative, are dominated by a handful of large companies, some of which enjoy very large market shares and generate returns that greatly exceed historical averages. And some companies are stockpiling cash or acquiring competitors rather than using their returns to build productive capacity.

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