The Profit Paradox by Jan Eeckhout Book Summary

The Profit Paradox, How Thriving Firms Threaten the Future of Work by Jan Eeckhout


Equity investors prefer firms as protected from their rivals as medieval castles with deep moats. Recent decades have seen powerful companies boom that are all but impregnable to competition. This is good for their investors but bad for customers, workers, other stakeholders and democracy. Professor Jan Eeckhout lucidly explains why market power is toxic to the economy and contrary to capitalism’s fundamental principles. He draws on centuries of economic literature, but makes his case in language accessible even to those with no formal economics training. His provocative exposition of market power and its consequences tackles a subject fraught with political and social implications. 


  • Even though workers are much more productive, they are getting a smaller share of the economic pie than when they were less productive.
  • Joseph Schumpeter’s theory of creative destruction posits that market power should be temporary.
  • As a consequence of market power, revenues have shifted from compensating workers to compensating owners.
  • Market power does not always derive from mergers and acquisitions.
  • Another source of market power in the contemporary economy is “learning” from data collection.
  • Corporations are in business to make money and often make money by exploiting the irrationality of consumers.
  • The fact of companies making enormous profits ought to make workers and customers better off. In fact, the reverse is true.
  • The only way to avoid an economic catastrophe comparable to those in the early 20th century is to firmly enforce antitrust regulation.
The Profit Paradox Book Cover

The Profit Paradox Book Summary

Even though workers are much more productive, they are getting a smaller share of the economic pie than when they were less productive.

Today, the wage premium of workers with a college education is 96%, relative to workers with just a high school diploma; it was 46% in 1980. Technology has increased productivity. Even a relatively minor innovation can help a company capture a global market – and, thus, gain a payoff much greater than before 1980. Technological change has also enabled just a few firms to dominate their markets. These firms often outsource functions that, in the past, would have remained in-house: They outsource menial services and employ only highly valued knowledge workers – who enjoy vastly greater salaries.

“The same determinants that lead to a decline in the wages of the common worker also create a wedge between the high- and low-earnings workers: the rise of market power by dominant firms.”

Changing technology and economic progress allowed a few firms to develop market power during the late 19th and early 20th centuries – the era of “robber barons,” such as J.P. Morgan, Andrew Carnegie, Cornelius Vanderbilt and John D. Rockefeller. Something similar is happening today. 

Famous investor Warren Buffett said that his ideal investment is a business as protected from competitors as a castle is surrounded by a moat. Monopoly allows a company to charge higher prices, though higher prices mean fewer consumers can afford to buy. However, those who can buy, pay more. In a competitive market, companies earn a return only on capital. Market power allows them excess profits. 

The profit paradox arises when these competitive firms use their technology and power in ways that benefit society but harm individual laborers.

Joseph Schumpeter’s theory of creative destruction posits that market power should be temporary.

According to Schumpeter, companies innovate, gain market power for a while and destroy lesser technologies. Thus, they earn profits that attract competitors, some of whom, ultimately, surpass the one-time market leaders. However, companies today often innovate specifically in order to deter competition. Sometimes, they do this by acquiring their competitors. 

Morgan and Rockefeller consolidated their industries in the Gilded Age without generating the benefits of Joseph Schumpeter’s creative destruction. Similarly, at present, Facebook controls 70% of social networking; four airlines enjoy a 76% market share in domestic US aviation; Home Depot and Lowe’s have 81% of the home improvement market; and two coffin and casket manufacturers dominate their markets with an 82% share.

“Those firms that run high markups also obtain a high share of the sales. This reallocation of business from low-markup firms to high-markup firms is what leads to the large, dominant firms.”

The price a company charges above its production cost is a “markup.” In the United States, the average markup in 1980 was 21%. Now, the average markup is 54%. Europe has experienced a similar escalation. New technologies are driving these rising markups across industries? Over the same time frame, the proportion of profit to payroll costs has shifted. At many firms, profit is still small in comparison to payroll, but at some firms, such as Apple and Facebook, profits reported in 2021 ballooned to 300%, compared to payroll.

As a consequence of market power, revenues have shifted from compensating workers to compensating owners.

One way that companies build market power is through mergers and acquisitions. A 2004 merger of Canada’s Labatt Brewing Company with Belgium’s Interbrew created a company that subsequently merged with a Brazilian brewer. The new entity adopted the name InBev, then it acquired St. Louis-based Anheuser-Busch to create AB InBev. After another merger in 2016, AB InBev captured an estimated 28% share of the global beer market. In the United States, Belgium and Brazil, the company has considerably more than 40% of the market. Although customers may see an abundance of brands in stores, that choice is an illusion, because one company is dominant.

“Only diverse ownership leads to competition.”

Greater size does little to keep markups low or to improve efficiency. Facebook owns Instagram and WhatsApp. Even though these apps are all free to the user, advertisers must pay more to reach those users than if the companies were independently owned. Sometimes, dominant firms make “killer acquisitions” with the intention of shutting down the acquired firm and thus eliminating a competitor or potential competitor.

Market power does not always derive from mergers and acquisitions.

Sometimes, as in the case of Amazon, market power comes from superior technology, which can result in lower costs and prices. However, it also means that smaller firms may be forced to close, decreasing competition. Destroying potential competitors allows Amazon to charge higher prices than it might in a competitive market, a disadvantage for customers. 

Amazon achieved market dominance in retail by leveraging technology, much as Sears and Walmart did previously. Sears introduced mail-ordering, so  customers could order from a catalog and receive their purchases by mail. The technological innovation of catalog ordering and postal shipping brought the customer lower prices and a broader choice of products – plus, Sears guaranteed their satisfaction. Walmart represented the next major wave of innovation in retail, offering the lowest prices on everything. Harnessing data allows Walmart to respond nimbly to shifts in demand.

“Economies of scale generate low costs, but not all of the cost savings are passed on to the customer. Hence both lower prices and more market power – that is, prices set competitively would be even lower.”

Amazon opens fulfillment centers based on market density and supply chain access. This requires a hefty investment in physical capital, but that helps deter competitors. Just before the Great Depression, Sears and A&P controlled 3% of retail – then considered a big share. Their market power resulted in an amendment to The Clayton Antitrust Act to prohibit price discrimination. Nowadays, Amazon and Walmart have 15% of the retail market share, yet there is, so far, no indication of regulatory efforts to do anything about their dominance.

Organic growth based on scale economies is also visible in other industries. Spain’s Inditex owns Pull&Bear, Zara and Bershka. Largely due to innovation in logistics, it is the largest clothing producer and retailer in Latin America, Asia and Europe. Zara, like Walmart, relies on information technology and logistics to respond to shifts in demand. It makes prototypes of clothing and schedules production depending on sales and feedback, putting new products in stores in less than two weeks.Like Walmart, Zara has realized cost reductions, but customers see only some savings in lower prices. The firms make higher profits through higher markups, enjoying economies of scale because of their distribution networks, technology and logistics.

Another source of market power in the contemporary economy is “learning” from data collection.

Self-driving cars, for example, depend on big data sets, and collecting such data requires hefty investments. Services such as Google Translate also depend on huge data sets. The first mover has an advantage. The expensive investment in data collection underpins economies of scale – a moat to protect market power.

Globalization further amplifies market power. Globalization resembles technological change in its ability to protect a firm’s market power. Companies involved in international trade have higher markups, and thereby exercise their market power. Unlike the physical capital of the age of the robber barons, intangible assets – novel ideas and research – secure the market power of dominant firms today. Intangible investments go to advertising in order to build the brand identity that allows the firm to charge higher prices, and to R&D in order to discover and execute new ideas that may lower costs or enable other strategies to suppress competition. Intangible capital now outweighs brick-and-mortar investments. Pharmaceutical companies spend great sums on R&D; Google spends on people and ideas. All these companies reap the reward of market power.

“Easy entry by competitors and the resulting competition is the entire paradigm on which the capitalist system within a competitive economy is built.”

Recent developments defy the logic of Schumpeter’s creative destruction. In the world of creative destruction, competitors would enter the market and nibble at market leaders’ profits. However, contemporary firms enjoy protection from competition because their investments in technology have given them vast advantages in cost and quality of service. The customer’s only hope for lower prices would be the development of a brand-new technology or government action.

Reducing payroll by offering lower pay or hiring fewer workers is another way that companies cut costs. Economy-wide market power leads to lower pay and, therefore, higher markups for the dominant companies.

Corporations are in business to make money and often make money by exploiting the irrationality of consumers.

Selling phony cures to gullible customers has a long history. Nowadays, companies take advantage of customers by analyzing behavior and psychology. They may, for example, offer low introductory prices that go up steeply after the introductory period. Gyms entice customers into signing membership contracts, expecting that they will stop coming but still pay. Another way to exploit the customer is to offer “free” products. Google Maps brings real benefit to users, as does Yelp. However, “free” is illusory. Users of such products, simply by using them, provide valuable data to the company. The data has more value than the service. 

“When the price is zero, in most situations one party is missing out.”

Social media companies try to maximize the time people spend on their apps. They know that information is itself addictive. In this respect, they resemble the tobacco companies of yesteryear. Social media addiction, like tobacco addiction, can do real social and psychological harm.

The fact of companies making enormous profits ought to make workers and customers better off. In fact, the reverse is true.

In the mid-20th century, economist Nicholas Kaldor argued that labor’s and capital’s shares of economic output were remarkably constant – notwithstanding structural economic change. Even when the workforce of the United States changed from being predominantly agricultural to predominantly involved in manufacturing or services, two-thirds of production still consisted of labor costs, sometimes aggregated through the supply chain, while one-third was capital. However, in the 1980s, the constants changed. 

Market power correlates closely with lower wages. A firm with market power can charge higher prices. Therefore, it can sell and produce less – meaning it needs fewer workers. Widespread market power depresses wages economy-wide. With fewer employment options available, large companies can then take advantage of workers and turn a profit in other ways. Uber, for example, locks gig workers into staying with the firm by subsidizing them initially. However, Uber has a wage policy of “minimum wage plus two,” – whatever the minimum wage rate is in a location, plus $2 – which means that, in the long run, drivers earn approximately that per hour, although mileage driven is ostensibly the basis for their pay.

“Instead of creating jobs, profitability due to market power lowers wages and destroys work. That is the profit paradox.”

Companies with market power compete for the best executives, thus driving up executive salaries. Big firms pay high executive salaries, in part, because this helps reinforce moats. Companies with market power can pay executives more because they can charge higher prices to consumers, reaping more revenue. This is an undesirable outcome for society, but investors such as Warren Buffett like it. Executive pay would be lower if there were less market power in the economy. 

Globalized market power has not only increased economic disparity, particularly in rural areas, it has stunted start-ups – with only half as many taking off today as 40 years ago. In creating a situation in which workers across the economy have lower purchasing power, market power has also contributed to the opioid epidemic and fed anti-immigrant sentiment.

The only way to avoid an economic catastrophe comparable to those in the early 20th century is to firmly enforce antitrust regulation.

It is critical to address the problem of market power without stunting technological innovation. Reforms must encourage the competition needed to bridge the moats and break the market power of dominant firms. This kind of reform will require an enormous commitment of resources and international cooperation. Part of the problem is that market and political power reinforce each other. Companies with market power employ lobbyists to reinforce their market power by influencing politics. 

There should be an independent Federal Competition Authority setting policies to encourage competition and thus protect democracy and economic well-being. This authority could, for instance, review mergers in order to develop a more realistic assessment of benefits than those usually predicted and promised by lobbyists in favor of the merger. 

“We need to put the trust back into antitrust.”

Data is an important contributor to market power. The authority should also compel companies to make data publicly available. When there were still competitors such as Myspace, Facebook promised not to use cookies and built its reputation on the protection of customer privacy. After it won the competition against Myspace, Facebook changed its tune and now uses such cookies. If competition had been real in that market, customer privacy protections might have continued to be one of the areas in which companies competed. 

About the Author

Jan Eeckhout

Jan Eeckhout is the ICREA Research Professor at Pompeu Fabra University in Barcelona. He has also taught at the University of Pennsylvania, University College London, Princeton University and New York University. His work has been featured in The New York TimesThe Wall Street JournalThe Economist and the Financial Times.

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