Market Power Rose, Why Didn't Profits?

Over the past six decades, the power of American firms to charge prices above their production costs — which economists call "market power" — has grown. In 1960, prices averaged about 10 percent above the cost of producing an additional unit of output. By 2020, that gap had widened to 25 percent. One might expect those widening margins to show up as a lasting rise in the share of gross domestic product (GDP) flowing to profits. They did not, as profits have averaged about 16 percent of GDP since 1960 and have fluctuated widely but without a lasting upward trend. The gap between the price and the cost of one additional unit is what economists call a markup, and a high markup does not by itself imply a high profit. A software firm's offering illustrates the distinction. Writing the code, building and maintaining the platform, and advertising the product require large up-front expenditures, while serving one more customer costs almost nothing, so nearly every dollar of every license is markup. Thus, that high markup is not pure profit, since the business must use it to recover the fixed costs associated with simply being in business. In our recently updated 2023 working paper "The Micro-Aggregated Profit Share," we measure markups and profits for thousands of U.S. firms between 1956 and 2024. We find that rising markups have not produced a lasting rise in profits, for a reason the software firm example makes intuitive: The fixed bills those markups must cover have grown alongside them. What looks like six decades of accumulating pricing power has been met by an offsetting force: the rising cost of simply being in business.