Over the past four decades, the United States has seen rising market power, slowing productivity growth and deepening wealth inequality. Giammario Impullitti and Pontus Rendahl explore how declining competition may be the common culprit.

From the inception of economics as a discipline, questions of competition, growth and the distribution of their benefits have been central concerns. Pioneers like Adam Smith and Karl Marx grappled with these issues, shaping our understanding of markets, wealth creation and its distribution. These concerns remain at the forefront of modern advanced economies. In recent years, the rise of "superstar firms" and the growing concentration of market power in the hands of giant corporations have become hot-button issues in economic policy debates.

From Washington to Brussels, policymakers are faced with questions about why a handful of companies dominate entire industries (Autor et al, 2020; Eeckhout, 2021; Philippon, 2019); why productivity growth has slowed down (Gordon, 2016); and why wealth inequality has reached levels not seen since the Gilded Age - the period of rapid industrialisation, economic expansion and growing inequality in United States during the late 19th century (Piketty, 2014). These concerns are not just academic - they are central to the economic challenges of our time.

Concerns are particularly acute in the United States, where market power has surged significantly since the early 1980s. Indeed, average markups - a measure of how much higher the price of a product is relative to its cost of production - increased from 20% to 55% by 2020. Meanwhile, productivity growth has stagnated, with a widely used measure known as "total factor productivity" slowing from 1.56% in the 1960 to 1980 period to just 0.77% in subsequent decades. The rise in market power and decline in productivity growth have coincided with a sharp increase in wealth inequality, as reflected in the growing share of wealth held by those at the top of the distribution.

Stronger competition policy enforcement and pro-competitive reforms can help boost productivity and reduce inequality

But what exactly is the link between market power, growth and inequality? And why should policymakers care? Our research provides a framework that ties these trends together, offering new insights into how market power shapes the economy.

Market power and the return gap

Piketty (2014) popularised the idea that wealth inequality is driven by the difference between the rate of return on assets (r) and the growth rate of the economy (g), known as the return gap (r minus g). A higher return gap increases inequality as wealthier households, who own more assets, benefit from higher returns and save more, further increasing their wealth. Poorer households, who rely more on wages, see their incomes stagnate due to slower growth and higher markups. This dynamic deepens the divide between the rich and the poor, leading to a more unequal society.

How does market power affect the return on assets and the growth rate? To answer this question, we build a model in which large firms invest in innovation to gain market shares and where aggregate innovation pushes up overall productivity growth, and uninsurable income risk generates differences in wealth across households.

Higher returns on assets are more likely to prompt richer households to increase their savings than poorer families

We engineer a rise in markups as a response to an exogenous increase in the cost of entry for firms. This rise happens because when barriers to entry rise, fewer firms compete in the market and this reduction in competition allows incumbent firms to charge higher markups, boosting their profits. Higher profits, in turn, increase the value of these firms, driving up returns and asset prices.

But reduced competition also affects innovation. Aggregate innovation (the sum of innovation by all firms) contributes to the economy's overall stock of knowledge, which functions as a public good, available to everyone. Firms continuously learn from one another, fostering a cycle of innovation and progress. When competition declines, this knowledge-sharing process weakens. With fewer competitors, opportunities for exchanging ideas diminish, reducing the efficiency of innovation and ultimately slowing economic growth.

This dynamic - in which weaker competition stifles knowledge spillovers – creates a direct link between rising market power and declining innovation efficiency. For example, a substantial decline in the productivity of research and development (R&D) in the United States over recent decades has been documented by Bloom et al (2020), a finding that is consistent with our theoretical predictions.

Finally, lower competition also conveys some bad news for people's wages, both now and in the future. Higher markups create a wedge between the price of goods and the associated marginal costs: wages. As markups rise, real wages fall. In addition, slower economic growth further exacerbates this outcome, dampening the prospects for future wage increases, which are closely tied to productivity growth.

The return gap and wealth inequality

Why does a rise in the return gap exacerbate wealth inequality? After all, if everyone has some wealth and is affected proportionately by a rise in the r minus g differential, wealth inequality would be unaltered. Our theory demonstrates that a widening return gap exacerbates inequality by affecting the saving behaviour of households in distinct ways across the wealth spectrum.

In our economy, uninsurable income risk implies that there are two reasons for saving: intertemporal substitution (for consumption in the future); and a precautionary motive, that is, in case of unanticipated future spending needs (Aiyagari, 1994). Poorer households, who are driven by the need to protect against the risk of future loss of income, predominantly save for precautionary reasons - to provide savings in case of adverse events. Whereas richer households, having attained a high level of self-insurance, primarily save for intertemporal reasons - to provide savings for planned and known events such as retirement or buying a house.

An increase in asset returns enhances the incentive to put more into an optional savings pot rather than spending money now, but has little impact on those saving as a precaution against losing their income. As a result, wealthier households respond more strongly to rising returns, increasing their savings at a higher rate than asset-poor households and further accumulating wealth.

Our research also sheds light on the implications of rising market power for people’s overall wellbeing and economic situation. We find that the increase in markups and the slowdown in growth since 1980 have negatively affected most households. For the bottom 80% of the wealth distribution, these losses have reduced their long-term spending power by roughly 34%.

In contrast, the top 1% of households have seen significant gains, with the top 0.1% experiencing a 30% increase in their spending power. This means that while the rise in market power has benefited a small fraction of the population, it has come at a significant cost to the broader economy.

Rethinking competition policy

In the last four decades, advanced economies have witnessed a secular rise in both market power and inequality, as well as a slowdown in productivity growth. While these trends have happened concurrently, they may not have happened independently. Indeed, our research indicates that the rise in market power alone could have been a strong contributing factor to the rise in wealth inequality and the slowdown in productivity growth.

Weak competition lets dominant firms raise prices, suppress wages and stifle innovation, thereby slowing economic growth. Meanwhile, higher asset returns benefit the wealthy, widening inequality by amplifying differences in savings behaviour. Rising markups drive stagnation and wealth concentration, underscoring the need for stronger competition policies to foster innovation, productivity and fairer economic outcomes.

When firms have fewer competitors, there is less innovation and slower economic growth

One takeaway from the intertwined nature of these secular trends is that economic policies may have unintended consequences in domains where they do not directly operate. This might, for example, require a multi-targeted approach for competition policy. Given the role of market power in exacerbating wealth concentration, policymakers should rethink competition policy’s broader economic and social implications.

Legal scholars have recently begun to recognise the role of evolving US antitrust laws in shaping wealth inequality (Khan and Vaheesan, 2017). Stronger enforcement and pro-competitive reforms can help to restore not only innovation and productivity but also a more equitable distribution of economic gains.

As policymakers take on these challenges, they must consider not only the immediate effects of their decisions, but also the long-term consequences for growth and inequality. By addressing the root causes of market power and its distributional effects, it may be possible to create a more prosperous and dynamic economy that also encompasses a more even distribution of both gains and losses.

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20 June 2025     Paper Number CEPCP702

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This CentrePiece article is published under the centre's Growth programme.