ICLE White Paper Examines Impact of Intangible Capital on Competition
PORTLAND, Ore. (March 7, 2022) — Many of the most significant changes in the competitive landscape in recent years derive not, as some critics claim, from declining competition, but rather from the increasing importance of intangible capital, according to a new white paper from the International Center for Law & Economics (ICLE).
The scalability, spillovers, and synergies associated with assets like R&D, brands, software, and organizational development can prove especially beneficial for large firms and incumbents, who enjoy higher returns from their portfolios of complementary intangibles, but it also means that challengers can grow quickly, authors Jonathan Haskel and Stian Westlake argue.
Haskel is professor of economics at Imperial College London’s Imperial College Business School and director of the school’s doctoral program. Westlake is chief executive of the Royal Statistical Society. The ICLE white paper is adapted from the pair’s forthcoming book Restarting the Future: How To Fix The Intangible Economy.
The pair note that recent empirical tests finding increased market concentration, a growing gap between the performance of market leaders and laggards, and a trend toward conglomeration have mostly been seen in the most intangible-intensive industries.
“The mark-ups of American firms and total rate of return are mostly unchanged when one accounts for intangibles in firms’ capital,” the authors write. “To put it another way, the runaway profitability of businesses is at least partly an artifact of using the wrong denominator, omitting an increasingly important part of the capital stock that businesses invest in.”
While the growing importance of intangibles provides reason for optimism about the future of competition, an intangible economy is unquestionably harder to regulate, requiring changes to the institutions that enforce competition policy, Haskel and Westlake write. They emphasize that competition policy should remain focused on consumer welfare and ensuring that markets are contestable. However, they note that regulators now need to understand a wide variety of new business models, market-access dynamics, and the impact of digital technologies on pricing.
The paper’s final section examines the effects of intangible capital on competition among individuals and workers, as seen in the competition for schools, jobs, and status. They document that the shift has increased workers’ incentives to invest in costly signaling devices, notably educational credentials. One path forward is to remove policies that unnecessarily funnel excessive resources into higher education.