Inequality and the Lake Wobegon Effect

From an interview of F. M. Scherer (Professor Emeritus in the John F. Kennedy School of Government at Harvard, and former chief economist at the Federal Trade Commission) at ProMarket:

“Our Efforts to Deal With Tech Firms’ Market Dominance in the U.S. Have Been an Abject Failure”: …Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

Our efforts to deal with the problems in the United States have been an abject failure. …I might note that Facebook’s dominant position in the market is due in part to its role as an innovator and partly to “network externalities”… Microsoft’s dominant position is also attributable in part to network externalities… 

But the antitrust agencies have not taken sufficient measures to remedy abuses of this advantage.

Q: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

I believe there is. The evidence of rising wealth inequality, especially through the work of Piketty and co-authors, is compelling. Less well known is evidence compiled at M.I.T. of strongly rising inequality of compensation, especially at the top executive levels. The nexus has not to my knowledge been fully articulated.

Here’s my hypothesis: In recent decades, most publicly-traded corporations, at least in the United States, have embraced executive compensation consultants to advise the board of directors on executive compensation levels. Those consultants provide data on compensation averages and distributions for companies in peer industries. But then the Lake Wobegon effect goes to work. The boards say, “Surely, our guy isn’t below average,” to the average reported by the compensation consultants becomes the minimum standard for compensation. If each top executive receives at least the minimum reported pay and often more, the average rises steadily. 

Indeed, and here I tread on weaker ground, those compensation costs are built into the costs considered by companies in their product pricing decisions (in a kind of rent-seeking model), and so price levels rise to accommodate rising compensation. I might note that this dynamic applies not only for chief executives, but trickles down to embrace most of companies’ management personnel. …