Free Enterprise in the Current Business Environment

It is well established that economies arranged around free enterprise and fair competition have been essential to elevating the standard of living that we enjoy today.^[1] These free and competitive economies are theoretically self-regulating, meaning the forces of supply and demand create efficient commercial conditions that compel market participants to benefit companies and consumers alike – where profits and prices are rational, value is appropriately calibrated, and goods and services are reasonably allocated.^[2]

Free enterprise is theoretically self-regulating because various factors – like structural deficiencies within the free market system, government intervention, and cronyism – can tilt economies away from perfect competition towards systems that reward market power at the cost of true competition. Companies safe from pure competition often enjoy artificial market dominance, contrary to the ideals of free enterprise. Such companies can determine prices against the influences of supply and demand, create barriers to entry that limit new competitors, and limit the information and choices that consumers should enjoy.^[3] These monopolistic forces subvert the economic efficiencies that have contributed to the outsized progress and advancement we have seen the last few centuries.

The Denny Center for Democratic Capitalism at Georgetown Law, which provides research and analysis to reconcile the benefits of free market capitalism with the values and expectations of a democratic society, recently analyzed the concerning symptoms of worsening free enterprise in its Inaugural Report on the Health of Democratic Capitalism.^[4] The report found that business sector concentration is increasing and, in some sectors, threatening the essential beneficial effects of market competition. Since the late 1990s, over 75% of U.S. industries have experienced increased corporate concentration and the number of public companies has dropped by almost 50% in the last two decades.

The report’s vital statistics of American business raised questions about the consequences of concentration including: How increasing concentration might impact market quality, what is driving market concentration, and what is the role of government in influencing market competition? This paper focuses on providing a more in depth response to the questions raised in the report.

What is Driving Concentration?

Markets with imperfect competition can lead to one (monopolistic) or a few (oligopolistic) entities attaining outsized control of an industry’s market share. Particular industries – including defense, healthcare, telecommunications, and pharmaceuticals – have seen extreme concentration^[5] in the past century, with policymakers fearing that large firms are dominating American markets.^[6] More concentrated, less competitive markets can suffer higher consumer prices, weaker economic growth, lower innovation, and increasing wealth inequality.^[7]

While there is no academic consensus on what is driving corporate concentration, there is general consensus that less competitive economies weigh negatively on society. Rising corporate concentration in the U.S. has coincided with rising corporate markups and profits, weak wage growth, as well as reduced corporate investment, growth, and market entry rates.^[8]

Various factors may contribute to and incentivize concentration. In less-competitive markets, individual firms with greater market shares can command higher prices, extend their profits, and use those profits to gain advantages over competitors.^[9] There are greater opportunities for firms, particularly in oligopolistic industries, to potentially collude and artificially increase prices.^[10]

Nonintervention by government antitrust actors, historical bellwethers against competition-harming mergers and acquisitions, may play a role. Since the mid-1980s, mergers and acquisitions in the U.S. have increased in number and total value, yet criminal and civil enforcement filings have fallen to historic lows, enforcement actions have not kept pace with increased filings and GDP growth, and funding for antitrust enforcement has fallen.^[11]

Additionally, technological advances that favor larger firm size, the global scope of economies of scale, and the increasing value of intangible assets may all contribute to less competitive American markets.^[12] While it is not abnormal for market concentration to fluctuate from the back and forth of firm competition, it is the anti-competitive efforts that firms pursue outside of standard commercial behavior that is particularly concerning.

Rent Seeking, Lobbying, and Market Competition

A troubling practice that may be contributing to poorer market competition and increased concentration is rent seeking. ^[13] Rent seeking refers to efforts that market participants pursue to increase their own wealth without creating any additional benefit to society – to get “something for nothing”.^[14] Firms can strengthen their rent seeking efforts by lobbying government officials and agencies; to influence the laws and regulations that govern their industries.

Lobbying plays an important role in American governance. Firms employ constituencies across the country and are positioned to provide technical expertise to lawmakers in developing new policies. But when firms use significant funding and professional lobbyists to engage the government in pursuit of anti-competitive goals, corporate advocacy can become harmful rent seeking. Government decisions that favor firms with the resources to effectively influence policy-making threaten market competition and imperil our system of free enterprise.

Though in the past, companies typically lobbied for government nonintervention, today corporations often engage in lobbying to illicit government action.^[15] The government action that corporations advocate for^[16] may be securing massive government contracts, passing favorable regulations, discouraging industry participation of potential competitors, and securing implicit bailout support as companies that are “too big to fail.” Additionally, when dominant firms can rely on government bailouts, they may be more motivated to assume risk than less established firms.^[17]

The corporate money poured into lobbying efforts is significant, and the incentives to doing so are evident. The top 20 lobbying industries have spent more than $44 billion advocating the federal government since 1998.^[18] Recent research in this space has shown how profitable corporate lobbying can be, returning an investment of $200 for every $1 spent^[19] and increasing shareholder wealth by a quarter-billion dollars annually. The ten Fortune 100 companies receiving the most federal funding saw a return on investment from lobbying of $1,000 for every $1 spent.^[20]

The corporate benefits from rent seeking and lobbying are diverse. Firms that spend more on lobbying in a given year also tend to see lower effective tax rates^[21] in the next year. The 55 largest corporations, which paid $0 in federal corporate income taxes in 2020, spent $450 million on lobbying and political contributions over the last three election cycles.^[22] Firms may also engage in “regulatory capture” when influencing federal regulators.^[23]  Regulatory capture refers to government agencies prioritizing the interests of the industry they are charged with overseeing, implementing policies favorable to those industries at the cost of innovation, competition, and the public interest.

Besides negatively impacting corporate competition and undermining free enterprise, rent seeking is also decaying public confidence in the intertwined systems of American democracy and capitalism. Market concentration is extremely unpopular, with 70% of Americans saying the U.S. economic system unfairly favors the powerful.^[24] Though a vast majority of Americans still support free enterprise, most do not view big business or the federal government favorably.^[25] Despite the incredible advances and quality of life that free enterprise has given us, Americans are fed up with the current state of our business environment. Democracy and capitalism coincide because they are responsive – to social and commercial preferences. But corporate rent seeking, capitalizes on market share which negatively influences democratic institutions and undermines this system.

Combating Rent Seeking to Restore Competition and Healthy Free Enterprise

On the issue of limiting the influence of lobbying on the government, there is already significant discourse – focusing on corporate fundraising, disclosing or limiting conflicts of interest, closing the revolving door, and broadening lobbying disclosure requirements.^[26] But to target negative rent seeking within the corporate-government dynamic as it relates to free enterprise and market competition specifically will require a holistic approach, one that incorporates private and public transparency, monitoring, and enforcement.

Public investment in government staff and resources may make them less dependent on corporate input related to increasingly large and technical legislative actions.^[27] Additionally, reorienting and resourcing federal antitrust actions with a renewed focus on market competitiveness may address rising corporate concentration.^[28] Though some would argue that the regulatory scope of government should be curtailed to limit market intervention, recognizing regulatory oversight as an inevitable aspect of government function, it may be more effective to prioritize competition-oriented regulation rather than regulatory withdrawal across the board.

Beyond public sector solutions, private industry has a role to play in creating a healthy corporate-government dynamic that combats rent seeking and encourages free enterprise. Though the gains from rent seeking are evident, such profits come at the cost of undermining the corporate environment that makes American business so successful. Committing to the ethos of pro-market rather than pro-business lobbying, does not mean an end to corporate advocacy. Whereas lobbying from individual firms can lead to harmful rent seeking, collective lobbying through trade and business association[29] advocacy, can speak for whole industries. Collective, coalition advocacy can advance the benefits of the corporate-government dynamic without favoring individual firms. Private industry has an important role to play in reforming and reorienting the corporate-government dynamic and contributing to greater market competition.^[30]

Recognizing the American system that encourages corporate competition and free enterprise is intrinsically important for business development, quality of life, and national progress means that supporting this system must be a goal in and of itself. Supporting competition and free enterprise ensures that the system can perpetuate the benefits we have enjoyed, rather than the deficiencies which are eroding confidence in our democracy and our economy.

^[1]  Free Enterprise and Economic Freedom, The Policy Circle (2022).

^[2] Caroline Banton, Free Enterprise, Investopedia (November 23, 2022).

^[3] Mark Thoma, What’s So Bad About Monopoly Power?, Money Watch (September 18, 2014).

^[4] Inaugural Report on the Health of Democratic Capitalism, The Denny Center for Democratic Capitalism (May 2022).

^[5] Monopoly by the Numbers, Open Markets Institute.

^[6] Leena Rudanko, Is Rising Product Market Concentration a Concerning Sign of Growing Monopoly Power?, Federal Reserve Bank of Philadelphia (2021).

^[7] Kimberly Amadeo, What is Monopoly Power?, The Balance (October 23, 2021).

^[8] Matias Covarrubias, Germán Gutiérrez & Thomas Philippon, From Good to Bad Concentration? U.S. Industries Over the Past 30 Years, National Bureau of Economic Research (September 2019).

^[9] Heather Boushey and Helen Knudsen, The Importance of Competition for the American Economy, The White House (July 9, 2021).

^[10] Collusion, CFI (March 26, 2021)

^[11] Michael Kades, The State of U.S. Federal Antitrust Enforcement, Washington Center for Equitable Growth (September 2019).

^[12] Matej Bajgar, Chiara Criscuolo & Jonathan Timmis, Intangibles and Industry Concentration: Supersize Me, OECD (September 22, 2021).

^[13] Rent-Seeking, CFI (February 9, 2021).

^[14] Lachlan Carey and Amn Nasir, Something for Nothing? How Growing Rent-seeking is at the Heart of America’s Economic Troubles, Journal of Public & International Affairs (May 28, 2019)

^[15] Adam Andrzejewski, How The Fortune 100 Turned $2 Billion in Lobbying Spend Into $400 Billion of Taxpayer Cash, Forbes (May 14, 2019).

^[16] Crony Capitalism: Unhealthy Relations Between Business and Government, Committee for Economic Development (October 2015)

^[17] Mariathasan, Mike and Merrouche, Ouarda and Werger, Charlotte, Bailouts and Moral Hazard: How Implicit Government Guarantees Affect Financial Stability (December 8, 2014).

^[18] Lobby Data Summary, Open Secrets (2022).

^[19] Matthew D. Hill, G. Wayne Kelly, G. Brandon Lockhart and Robert A. Van Ness, Determinants and Effects of Corporate Lobbying, 42 Fin. Mgmt. 931 (2013).

^[20] Andrzejewski, supra note 17.

^[21] Brian Kelleher Richter, Krislert Samphantharak & Jeffrey F. Timmons, Lobbying and Taxes, 53 Am. J. Pol. Sci.  893 (2009).

^[22] Mike Tanglis, The Price of Zero, Public Citizen (June 2021).

^[23] Daniel Carpenter and David A. Moss, Preventing Regulatory Capture, The Tobin Project (2014).

^[24] Ruth Igielnik, 70% of Americans Say U.S. Economic System Unfairly Favors the Powerful, Pew Research Center (January 9, 2020).

^[25] Jeffrey M. Jones, Socialism, Capitalism Ratings in U.S. Unchanged, Gallup (December 6, 2021).

^[26] Fighting Special Interest Lobbyist Power Over Public Policy, Center for American Progress (September 27, 2017).

^[27] Louise Lee, Dealing With the Dominance of Corporate Lobbyists, Stanford Graduate School of Business (November 30, 2017).

^[28] US Antitrust Division Announces Shift in Enforcement Strategy to Reinvigorate Enforcement of US Antitrust Laws, Greenberg Traurig (May 31, 2022).

[29] Industry Profile: Business Associations, Open Secrets

^[30] Crony Capitalism: Unhealthy Relations Between Business and Government, Committee for Economic Development