Competition and market dynamism

Evidence suggests that competition has weakened on average in OECD countries in the past two decades. Markets have become more concentrated and less dynamic, while firms have higher markups on average. There are multiple factors related to these trends. These include structural transitions, such as digitalisation, the increasing importance of intangibles and globalisation, as well as an increase in mergers and acquisitions by leading firms. 

Weaker competition is concerning as it may lead to higher prices and less consumer choice, innovation, and growth. Thus, maintaining healthy competition is a policy priority. A holistic policy framework encompassing antitrust, industrial, innovation, and broader economic policies must be adopted to ensure competition. 

Since 2000, mergers and acquisition (M&As) activities have grown significantly. While M&A strategies can improve supply chains efficiency or gain access to new markets, they can also be used to reduce competition. Relatedly, M&As are associated with higher concentration and markups, suggesting that leading firms may use them to entrench their market position.

Antitrust policy must therefore play a careful balancing act. Strong merger control is necessary to prevent the emergence of monopolistic markets, especially in an era of increasing concentration, whilst still allowing efficient M&As. Moreover, to anticipate anti-competitive mergers, particularly those based on innovation, investigations must extend beyond transactions involving large market shares, as exemplified in the EU Digital Markets Act (DMA). 

Productivity growth has slowed in many OECD countries, and there is increasing divergence between leading firms and the rest. One leading explanation is the rapid growth of intangible assets, such as software and R&D, which are concentrated among relatively few firms with the scale and capabilities to benefit from them. In line with this, evidence suggests sectors intensive in intangible assets are more concentrated, have higher markups, and laggard firms catch up at a lower rate.

Policies should aim to boost market dynamism through the diffusion and adoption of technology and intangible assets, especially by young productive firms. This includes facilitating the entry and growth of productive firms, for instance through access to finance, whilst allowing the exit of unproductive firms to foster creative destruction. Innovation policies should be inclusive, targeting all firms - including entrants—and not only incumbents. 

Over the past two decades, many markets have become highly globalised. Markets that are more open to trade tend to have lower concentration and markups, suggesting a procompetitive effect of trade. However, the larger market size due to globalisation amplifies the returns to investing in intangible assets, which disproportionately benefit the largest firms.

Trade policy should be incorporated into countries’ broader economic strategies and integrated with industrial policy. It should promote openness to sustain competition within a flexible business environment where productive firms can grow. Additionally, trade policy should also support workers in transitioning and adjusting in an open modern economy. 

There is no single metric for assessing competition. Instead, analysts and policymakers must rely on a suite of measures such as industry concentration, markups, and business dynamism. Even then, ongoing debates persist on how to accurately define these measures.

Recent OECD work has developed methodologies to rigorously measure proxies of competition by defining the market more narrowly and capturing the geographical dimension at which firms compete. Additionally, a comprehensive scorecard capturing multiple facets of competition has been developed, and trends of multiple measures have been examined in detail. Policymakers should rely on such work to regularly monitor the state of competition across markets.