Monday, April 18, 2016
Why Are Large Corporations Reducing Capital Expenditures?
Paul Krugman, Larry Summers and other economists have been trying to explain secular stagnation. That is what they call an economy that is not stimulated by a very low rate of interest. In this article Krugman suggests that the lack of competition in many industries may be the reason for low levels of business investment in plant and equipment. He offered Verizon as an example of a firm that has monopoly power and little reason to make investments that would improve customer service. Verizon has not expanded its very fast FIOS network because it faces little competition in its market. It is more profitable for Verizon to milk its existing network infrastructure than it would be to expand its fiber optic FIOS network. Verizon is not unique. The market share held by the four largest firms in most industries, which is a sign of industry concentration, has been increasing along with a decline in capital investment. There is little need to compete on price or on superior customer service in industries with little real competition. That is why many large corporations are not taking advantage of very low interest rates to expand and improve their products and services.