America’s undeniable competition problem requires a regulatory fix

Competition is the bedrock of the U.S. economic system — driving businesses to lower their prices, improve the quality and variety of their offerings and develop the innovations that fuel economic growth. This October, the Biden administration released guidance that will inject a pro-competitive focus into the regulatory process, adding to a broader effort to make our markets more competitive.  

We are economists who study competition and took leave from our jobs at Stanford and Yale last year to work on the White House team that drafted this guidance. We believe the guidance is firmly grounded in economic principles and research — and should be welcomed by economists and other champions of competition from across the political spectrum.  

Economists have, for generations, recognized how regulation shapes the competitiveness of our markets. George Stigler, a father of the Chicago School of Economics, built his Nobel Prize-winning career studying how businesses distort the regulatory process to inhibit competitors. Decrying the same forces of regulatory capture, Milton Friedman famously argued that businesses (along with academics) were the biggest enemies of free markets.  

By the same token, economists have long understood that well-designed regulations can strengthen competitive forces. Rules that require banks to display interest rates in a standardized APR format make it easier for us to comparison shop for the cheapest loan. Regulations that allow us to keep our cell phone numbers when we change providers make it easier for consumers to switch cellular plans.  

The little-known but influential Office of Information and Regulatory Affairs reviews significant regulations to make sure they are in the public interest. Rules that pass benefit-cost analysis are cleared, while rules that fall short of this threshold are generally sent back for modification or withdrawal. The guidance released earlier this month will raise the prominence of competitive effects in the design and review of regulations.  

Moving forward, it will be easier to pass a regulation that enhances competition. Data portability rules in digitized industries, which help offset the network effects that lock consumers into dominant platforms, will get due credit for their pro-competitive effects. So too will open banking rules, which, by allowing consumers to take their personal financial information to another provider, reduce switching costs in the financial services industry.  

The heightened focus on competition will also encourage agencies to modify rules in a pro-competitive manner, such as by replacing one-size-fits-all design requirements with goal-oriented performance standards. The guidance gives the example of how a goal for emissions reductions from concrete used in buildings — rather than specific technical requirements — could allow more competition from companies with different concrete production processes and encourage entry into the market by innovative firms that come up with new ways to lower emissions at a lower cost.  

The guidance will also help block the types of rules — often pushed by dominant companies — that are designed to hamstring competition. Rules that require new or modified products to undergo excessively expensive and lengthy certification can generate competitive harms that greatly outstrip benefits to public health or safety. Similarly, unnecessary or excessive licensing requirements for workers can block new business models, raise prices for consumers and limit job opportunities for marginalized workers who may be disproportionately burdened by the fees and training requirements of professional licensing programs.    

The U.S. economy is suffering from a decades-long decline in competition. A wide range of industries — from airlines to beer — are being increasingly dominated by a small number of big companies. Markups — the gap between the prices we pay and companies’ costs — have risen substantially since the turn of the century. In his sweeping account of these trends, economist Thomas Phillippon calculates that consolidation is costing the typical household an extra $5,000 per year.  

The Biden administration has made restoring competition a central plank of its economic agenda. Coming out of the blocks, the administration directed agencies to take action on 72 initiatives to promote competition — such as changing regulations so hearing aids could be bought over the counter at a fraction of the cost — and set up a first-ever competition council to turbocharge these efforts. The antitrust agencies are back on the beat and are updating their merger guidelines to reflect the modern economy and advances in economic research. This regulatory guidance is another step in this endeavor.  

Competition is in America’s DNA — we love to compete in everything from spelling bees to BBQ cookoffs. Yet for too long, we haven’t used all of our tools to promote competition in our markets. 

There is still work to be done, but there are promising signs that we are finally turning the corner and getting serious about promoting competition again.

Neale Mahoney is a professor of Economics at Stanford University. Michael Sinkinson is an associate professor of Economics at Yale University. They are part of the team that drafted the Guidance on Accounting for Competition Effects When Developing and Analyzing Regulatory Actions.