Most economic debates about competition are stuck counting heads, but this piece from Works in Progress argues we should be measuring results. The editors make a startling claim: the standard metrics regulators use to police monopolies—market concentration and profit markups—are not just imperfect, they often point in the wrong direction, punishing the very efficiency they claim to protect. For busy leaders navigating complex markets, this offers a vital correction to the assumption that fewer companies always means less competition.
The Trap of Traditional Metrics
The article dismantles the conventional wisdom that a market dominated by a few large players is inherently broken. "Competition is one of the only economic forces to have laws and dedicated regulators set up to promote it," the piece notes, yet it immediately pivots to the paradox: "virtually everyone agrees that competition is a very good thing, it is much harder to agree on what competition actually looks like." Instead of defining competition by how many firms exist, the editors argue we should look at whether the market rewards excellence.
The text highlights how standard concentration metrics can be misleading. "Nationwide, concentration in America's retail sector has been rising since the early 1990s," Works in Progress reports, "but retail concentration at local levels increased by only about a third over the same period." This distinction is crucial. The rise of national chains like Walmart often means new stores opening in areas that previously had no competition at all, driving down prices and improving offerings. "Rising concentration can be a sign of a market that is working well, with more productive companies growing at the expense of lesser ones." This reframing is powerful because it separates the outcome of efficiency from the structure of the market.
"The measure is not just noisy: it often points in the wrong direction."
The piece also tackles the obsession with profit markups—the gap between production cost and price. Critics often view high markups as a sign of monopoly power, but the editors suggest a different reading: "High markups could simply be a reward for investment in better products or cost-saving technologies." They point to Novo Nordisk, whose massive profit growth on drugs like Ozempic reflects the return on massive R&D investments, not necessarily a failure of competition. "Companies that make breakthroughs or other productivity improvements must earn higher markups for some period of time, or else there would be little incentive to bear the costs of becoming more productive." A counterargument worth considering is that high markups can indeed persist in non-competitive markets due to barriers to entry, but the editors' point stands: a high markup alone is not proof of anti-competitive behavior.
The Holy Grail: Measuring Dynamism
So, what is the alternative? The editors propose a shift from static snapshots to dynamic movement. "A more useful measure of competition would be based on what we're actually trying to get competition to do, working backwards from the outcomes we want." They introduce the Olley-Pakes decomposition, a statistical method that measures whether customers are actually switching to more productive companies. "If productive companies are gaining market share, we might judge that the market is competitive and working well."
To illustrate this, the piece dives into the history of the auto industry, drawing on the legacy of the Toyota Production System. In 1950, Japanese manufacturers were a fraction of US output, but they had developed superior efficiency through "pull" manufacturing and standardized parts. "By 1963, Toyota workers were overseeing five machines each, compared with three in 1949." Yet, when they first entered the US market, the overall industry productivity barely budged because they held such a small share. "While their extremely productive plants... had now joined the market... the Japanese companies were producing so few cars that this barely affected the total."
The real shift happened when the market allowed these efficient firms to grow. "Over time, American consumers began to realize how good Japanese vehicles were," and as they switched brands, resources flowed to the more efficient producers. The Olley-Pakes decomposition captures this shift: "The difference between these, called the 'covariance', reveals whether the market is actually rewarding efficiency." If the covariance is positive, the market is healthy; if negative, something is blocking the efficient firms from growing.
Proof in the Breakup and the Reforms
The editors test this theory against two historical case studies: the breakup of AT&T and the economic liberalization of 1990s Colombia. In the case of the telephone monopoly, the piece notes that for decades, "AT&T operated America's dominant phone network... and provided both phone services and the devices that connected to the network." After the Carterfone decision and the subsequent breakup, the market exploded with new entrants. "The number of manufacturing plants of telecommunication equipment... nearly doubled between 1967 and 1972."
Crucially, the Olley-Pakes metric showed that the nature of competition changed. Before the breakup, "a plant's efficiency had virtually no connection whatsoever to how much it produced." But once the market opened, "The correlation between a plant's efficiency and its share of production jumped from 0.01 to 0.28 by 1980." This proves that the metric can distinguish between a market that is merely fragmented and one that is actually rewarding efficiency. "Unlike concentration measures, the Olley-Pakes decompositions can judge that competition is strengthening as industries consolidate, if the success of more productive firms is what is driving that consolidation."
Similarly, the piece looks at Colombia's 1990s reforms, noting that unlike other nations, "1990s Colombia was not in the midst of an economic crisis." Instead, driven by external pressure and a reformist government, the country liberalized trade. The result was a market where resources shifted toward the most productive firms, validating the editors' argument that we should measure the flow of market share, not just the size of the players.
Bottom Line
The strongest part of this argument is its refusal to treat market structure as a proxy for market health; it demands we look at whether the market is actually rewarding the best performers. Its biggest vulnerability lies in the difficulty of implementing the Olley-Pakes decomposition in real-time regulatory decisions, as it requires granular, real-time data that is rarely available to antitrust enforcers. Readers should watch for how this framework might reshape future merger reviews, potentially allowing consolidations that drive efficiency while blocking those that merely reduce the number of players without improving performance.