Corporate power is in the crosshairs of the Biden administration. Through appointments to the Department of Justice and the Federal Trade Commission and his own statements, President Biden has signaled a desire to rein in some of the largest corporations in the United States. The DOJ sued Google for monopolistic conduct in January (the second such federal suit against the digital giant), and the FTC is reportedly preparing a lawsuit against Amazon that could be filed in the next few months.
Critics of the administration’s approach have accused antitrust officials of pursuing a “big is bad” policy. Implicitly or explicitly, such critics believe that corporate bigness can yield public benefits, such as lower production costs and the potential for lower consumer prices. They contend that the administration’s antimonopoly efforts could drive up prices and worsen inflation.
But big corporations are not of a piece. Large firms, whether measured by employees, sales, or assets, should be thought of along at least two axes. First is centralized, whereby a company owns a small number of very large production facilities, versus decentralized, meaning the firm aggregates many production facilities (some of which can be large in their own right). Second, whether the firm principally grew through organic expansion or mergers and acquisitions.
The structure and growth of bigness matter: Production in large plants and internal expansion can yield social benefits that dispersed holdings and growth through acquisitions generally do not. In the early and mid-20th century, Congress grappled with these important differences and sought to promote large-scale production over scattered holdings and internal expansion instead of mergers and acquisitions. In pursuing their antimonopoly aims, officials in the Biden administration should look to these precedents to ensure that its efforts will advance the public interest.
Centralized vs. Decentralized
By concentrating production in large facilities, companies can achieve economies of scale that lower the costs of production. Large-scale equipment can be operationally more efficient than smaller units. In some industries, economies of scale may be so significant that production can be done only on a large scale. For instance, in the 1970s an auto assembly plant was estimated to have a minimum efficient scale of 100,000 to 400,000 units per year. Further, production of multiple related products can yield cost savings, or economies of scope. Think of an oil refinery, which typically produces not only gasoline but also products such as diesel and jet fuel.
To be sure, scale does not automatically translate to lower costs. In some industries, production might be undertaken on a small scale with little or no disadvantage, and it’s possible to attain economies of scale at medium-sized production units. At times, scale can even be a problem. In the power sector, some larger generation and transmission projects have been plagued by significant construction delays and cost overruns. As we’ve seen during the pandemic, overly centralized production can create fragile supply chains: Shutting down a single large meatpacking plant can significantly reduce the supply of beef, pork, or poultry in a region.
Research has found that companies that are big but less centralized — for instance, ones that own facilities spread across the country or around the world — enjoy more limited advantages. This type of scale can yield benefits in the form of lower costs, as a distributed network can avoid the need to transport goods over long distances, and spreading out production across multiple facilities can mitigate the consequences of a disruption at a single plant. But leading industrial organization economist F.M. Scherer wrote in the 1960s that “the relevant gains from multiplant operation were modest.”
More recent research supports Scherer’s finding that aggregating many production units under common ownership does not yield significant operational efficiencies. And if local and regional markets are best served through a network of local and regional distribution and production facilities, what is the public benefit of a single national corporation consolidating its ownership in place of many local and regional firms? Scale tied to the aggregation of assets comes with organizational challenges that can cause significant inefficiencies. Top-level management may have a harder time directing a dispersed team of managers, necessitating the creation of additional layers of administration to ensure that the corporation and its disparate parts are run effectively. And this bureaucracy can add costs and be a source of inefficiency on its own.
Congress has historically distinguished between the two types of corporate bigness. In the Public Utility Holding Company Act of 1935 (PUHCA), a major New Deal law, Congress aimed to break up holding companies that owned local electric and gas utilities spread out across the nation and were not — and could not be — physically connected. These holding companies, the drafters argued, centralized control without offering public benefits such as improved system performance or lower costs of generating and distributing power. One economist characterized such corporate entities as “the helter-skelter formation of systems of poorly integrated properties in defiance of all principles of engineering technique and operating efficiency.”
The sponsors of PUHCA, however, did seek to encourage larger integrated utility systems serving a single state or region. A single large system could take advantage of diversities of load in a particular area; for example, peak demand in an industrial city might happen during a different time of day or season of the year than peak demand in an agricultural market town 100 miles away. Further, such a system might have complementary generation assets, such as coal-fired power plants that ran all the time and hydroelectric dams that could easily ramp output up and down in response to changes in load. And even then, larger utility systems were not strictly necessary to achieve those operational benefits. Neighboring utilities could and did enter power pooling arrangements in which they agreed to provide standby power to one another or to operate certain generation and transmission facilities jointly while otherwise remaining independent systems.
In administering PUHCA, the Securities and Exchange Commission followed the text and purpose of the law. It broke up sprawling holding companies that owned utility systems across the country. At the same time, it preserved and even augmented integrated power systems that served a single state or region. For decades the law, which Congress repealed in 2005, preserved a relatively decentralized power system regulated at the state and local level.
Although technology has changed a lot about how business is done, the analysis above still stands. The ability of giants like Amazon and Walmart to offer low prices has as much to do with their power as their efficiency. Companies like these are able to use their buying clout to extract lower prices from their suppliers, typically to the detriment of those suppliers and their workers. Indeed, one scholar found that the growth of large retailers and their buying power explains about 10% of the wage stagnation in the United States — the divergence between worker productivity growth and wage growth — from the late 1970s to the mid-2010s. Reports of very high rates of severe workplace injuries at Amazon warehouses lend qualitative support to the exploitation story.
What about network effects and the increased value of a service or product with a large base of users? Since the 1990s, network effects have been hailed as one of the defining features of a modern economy. The paradigmatic examples are a telephone network, social media site, and operating system; their value is determined by how many people use them. For instance, software developers are more likely to write applications for operating systems with a large user base, and users are more likely to opt for systems with many applications.
Do network effects mean we need to accept large corporations and even monopolistic control of certain markets? Network effects and corporate organization are two distinct things. For example, a smaller wireless carrier can still be attractive to customers because federal law requires phone companies to connect users with one another. Verizon cannot prevent one of its wireless subscribers from calling a friend with a Boost Mobile plan. Further, network effects can be attained through industrywide or government development of open technical standards. Consider how we take for granted that our phone will connect to the Wi-Fi network at a coffee shop, library, or airport and that every appliance and device we purchase will have a plug that fits into an electrical outlet at home.
Organic Growth vs. M&A
The second axis of corporate bigness is how a firm gets big over time.
With internal expansion, firms grow large through the development of new capacity. They either expand existing plants and facilities or build new productive capacity. In undertaking internal expansion, they create jobs and increase the nation’s collective productive capacity. For instance, after the Obama administration said no to further consolidation among the big four carriers in the wireless industry, T-Mobile transformed itself from a target awaiting a savior into an effective competitor, upgrading its network and lowering rates. Growth through internal expansion can also involve the adoption of new methods of production that are superior to existing ones. As my colleague Brian Callaci has written, “When Bethlehem Steel was blocked from acquiring Youngstown Sheet & Tube in 1958, it reluctantly did what it had previously said was impossible and built a new, state-of-the-art steel mill in Indiana — the first of its kind in the U.S.” Through internal expansion, firms can increase their capacity, improve productivity, and develop new products.
In other cases, firms grow through mergers and acquisitions. They purchase existing businesses and assets or combine with another firm. In contrast to internal expansion, this method of growth involves the shuffling of legal claims to existing assets. While new legal entities may be created, the underlying productive structure is largely unchanged. Notwithstanding the claims made by proponents of consolidation, corporate mergers rarely yield the promised operational efficiencies and lower prices.
In enacting the Clayton Act in 1914 and strengthening it in 1950, Congress aimed to crack down on corporate consolidation. The sponsors and supporters of the law believed that corporations were acquiring awesome power through mergers and acquisitions. That power could have anti-democratic tendencies: Representative Emanuel Celler, a sponsor and champion of the 1950 amendments, identified large corporations in Germany as partly responsible for bringing Adolf Hitler to power, in 1933.
More prosaically, sponsors of the Clayton Act also wanted to channel business strategy away from mergers and acquisitions. One representative involved in the debate over the 1950 amendments contrasted “buying out going concerns” unfavorably with the expansion of capacity, through the reinvestment of profits or raising of funds through the issuance of debt and equity. In interpreting and applying the law, the Supreme Court recognized the distinction between internal expansion and mergers along with its social significance. The high court said:
Internal expansion is more likely to be the result of increased demand for the company’s products and is more likely to provide increased investment in plants, more jobs and greater output. Conversely, expansion through merger is more likely to reduce available consumer choice while providing no increase in industry capacity, jobs or output.
Two economists described the difference as “new plants, new products, and state-of-the-art manufacturing techniques” versus “paper entrepreneurialism.”
The anemic enforcement of the Clayton Act by the DOJ and the FTC in the past four decades has encouraged firms to grow through mergers and acquisitions instead of internal expansion. Since the early 1980s, both agencies have been broadly tolerant of corporate consolidation, notwithstanding their statutory directive. The result has been thousands of mergers and acquisitions every year, with more than 3,500 large and medium-sized mergers being reported to the DOJ and the FTC in fiscal year 2021, compared with about 1,400 in fiscal year 2012.
Firms that own a decentralized network of assets and grew through mergers and acquisitions play a central role in the U.S. economy today. Their scale concentrates power without necessarily producing offsetting public benefits. Many of the industrial giants of the mid-twentieth century concentrated production in a few large facilities and could plausibly claim some economies on account of that size. The Ford Motor Company built the massive River Rouge plant in Michigan to manufacture and assemble vehicles and to produce the steel and tires used in them. The “Rouge” was a testament to scale and scope in manufacturing.
Many of the corporate giants that are household names today are qualitatively different creatures than the Ford of that era. They bring disparate facilities and plants under common ownership and have often grown through M&A, not organic expansion. These things are true of the purportedly most dynamic corporations in the economy, such as Amazon and Google. Amazon, for instance, owns more than 180 warehouses across the country, with more than 20 each in California and Texas. And the House Judiciary Committee found that Google acquired more than 260 businesses from 2001 to 2020. Given these realities, the bigness we see everywhere is most likely more socially pernicious than past iterations of corporate gigantism were.
Defenders of corporate power assert that big is not bad. True, big is not categorically bad, but it should invite public suspicion and scrutiny. Corporate bigness concentrates power—in today’s financialized economy, specifically in the hands of controlling shareholders and executives. In some cases, corporate size produces major cost savings and is the result of years of investment in new capacities and capabilities. But in other instances, corporate size reflects the aggregation of hundreds of scattered plants and facilities and is principally a function of mergers and acquisitions. In aiming their antimonopoly weapons, the Biden administration’s trustbusters should set their sights on this second category, which concentrates control with few if any public benefits. They will probably find no lack of worthy targets.