In a fun new claim, many serious observers have argued that the recent rise in inflation is related to a rise in monopoly power (see here and here). As a matter of policy then, if you could curb monopoly power through vigorous antitrust enforcement, you would be able to tame inflation.

The claim is fun because it is totally not true but sounds like it could well be. Like the claim that waking up early in the morning makes you more productive. Or that reading the Harry Potter books make you more honest. The reason that the claim about monopoly power causing inflation sounds true is because there is an intuitive pseudo-logic to it. It goes something like: monopoly power allows firms to charge higher prices, there are so many large companies around us (and large equals monopoly, obviously) so the inflation we are seeing must be a result of their monopoly behaviour. Just monopolies being monopolies, right? Not exactly.

Inflation is fundamentally a macroeconomic concept, largely determined by the balance of aggregate demand and supply in the economy. If demand exceeds supply, price levels rise, inflation happens and equilibrium is restored. And there is plenty of reason to believe that our economies face excess demand.

For good reason, governments responded to the pandemic by expanding fiscal spending to support demand in the economy (furlough support, eat-out-to-help-out etc.). Also, many sectors of the economy have continued to do well during the pandemic (think of the businesses providing the deliveries you’ve been ordering, the new bikes or second-hand cars you’ve bought, streaming services you’ve been subscribing to) and many consumers have accumulated larger savings (think of that holiday from April 2020 that you’ve postponed 300 times by now). All these factors helped aggregate demand in the economy largely stay afloat. 

Aggregate supply, on the other hand, has taken a bigger hit. In the face of constant lockdowns and a general feeling of who-even-cares-anymore, supply chains everywhere have been disrupted by persistent shortages of labour and raw materials.

In a nutshell, the inflation we see can be explained by a combination of strong demand and weak supply. You don’t have to take my word for this – here’s former US Treasury Secretary, Larry Summers (who you might also know from this hilarious scene in ‘The Social Network’, where he brutally takes down a couple of Armie Hammers) explaining exactly this in lots more detail.

As competition economists, we routinely work on cases where regulators intensively examine the behaviour and incentives of firms suspected to have monopoly power. But I am yet to see any regulator attempting to assess the impact of a firm’s market power on inflation in the economy. Those familiar with the regulators’ RFI process would hopefully agree that even the most imaginative requests never include questions like:

– Please explain, with reference to internal documents and any available information, the impact of the Firm A’s pricing on the UK’s Consumer Price Index; or

– Please use the data available to Firm A to identify the top ten regions in the EEA where Firm A’s pricing led to the largest growth in annual inflation. For each of these please provide, in Excel format, the annual inflation caused by Firm A in 2019, 2020 and 2021.

The simple reason nobody is interested in questions like these is that the link between inflation and market power does not have any basis in economic theory (again, here’s Larry Summers explaining that in much stronger words). If it did, the same relationship should also imply that low inflation would be caused by a fall in monopoly power. Obviously, this did not happen – despite years/decades of low inflation, the fall in monopoly power during those years was never offered as an explanation.

Putting economic logic aside for a minute though, I fully support this spurious association of competition economics with topics like inflation. Macroeconomists have long monopolised commentary on these big econ questions and, as a microeconomist working on competition issues, I can think of no better way of reclaiming some of those questions than to hitch my wagon to fun/sketchy claims about monopoly power (mainly because, as explained earlier, these topics are not really related). To build on the inflation claim, here are a few more totally unfounded claims I’ve made up to ascribe monopoly power way more importance than it’s due:

– Fixing monopoly power will lower unemployment. We know that Big Tech holds a lot of market power. Firms like Google have complete control over who they hire. Candidates often have to go through more than 5 rounds of interviews before being offered a job. No wonder we’ve got an unemployment problem. Strong antitrust action will reduce firm power in choosing workers and make it easier for everyone to get a job. At Google. Or anywhere you want.

– Fixing monopoly power will help you stick to your new year resolution. No matter what your resolution is, it becomes so hard to resist the temptation to cheat a few weeks into January. And it’s always these firms with monopoly power dangling irresistible products at you. My resolution to read 50 pages a day in 2020 was blown out of the water by the illegally entertaining Disney+ show ‘Only Murders In The Building’. Stricter action against monopoly power will help us moderate this type of dangerous excellence in content creation.

– Fixing monopoly power will us get out of the pandemic. It’s been two exhausting years and the virus still refuses to die out. We now know that it’s annoyingly capable of adapting into new variants and continue to spike every few months. Who else is capable of adapting and surviving in tough conditions? That’s right, it’s firms with monopoly power. And as long as COVID has these resilient role models it can look up to, it’ll remain hard to contain.