The challenge of distinguishing between oligopoly and innovation rents

Corporate profit margins have risen continuously and sharply in OECD countries. It is well known that their rise is linked in particular to the rise in the weight of “superstar” companies in the economy (1) : thanks to innovation and globalisation , these companies have the capacity to be highly profitable (the wage share of their value added is low) and to become very large (they benefit from growing returns to scale). From an economic policy viewpoint, it then becomes important to distinguish between: Innovation rents: companies’ profit margins rise because they innovate and have better products. This is desirable ; Oligopoly and monopoly rents: companies’ profit margins rise because they are in a monopolistic situation, having wiped out their competitors thanks for example to lower unit production costs due to their level of production. ( 2) To try to find out whether innovation rents or oligopoly and monopoly rents dominate in OECD countries, we compare the evolution of profit margins with companies’ level of innovation and modernisation across OECD countries. If profit margins are higher in countries where the level of innovation is higher, this would point to the hypothesis of innovation rents. We find that high profit margins are associated with high R&D spending and a large new technology sector: not all rents are oligopoly rents. D. Autor, D. Dorn, L. Katz, C. Patterson, J. van Reenen “The Fall of the Labor Share and the Rise of Superstar Firms” October 2019 (Quarterly Journal of Economics), NBER Working Paper No. 23396, May 2017, and the revised version of the Center for Economic Performance, CEP Discussion Paper No. 1482, May 2019 P. Aghion, A. Bergeaud , T. Boppart , P. Klenow , H. Li “A Theory of Falling Growth and Rising Rents” Federal Reserve Bank of San Francisco Working Paper 2019-11 , august 2019 , show the inefficiency that results from dominant companies expanding into new markets and crowding out smaller companies, which are discouraged from innovating