- As inflation neared its highest level in 40 years, some lawmakers renewed complaints of a direct relationship between increased market concentration and rising prices.
- This study finds no evidence for this claim; moreover, previous research from the American Action Forum has dispelled the claim that there is a trend towards increased market concentration.
- Industry Level Producer Price Analysis Data of the U.S. Bureau of Labor Statistics and Market Concentration Data from the United States Census Bureau Economic census showed almost no correlation between the level or percentage point change in the market concentration ratio and the percentage change in the producer price index (PPI).
- The data also revealed that more industries classified as highly concentrated reported a smaller increase in their associated PPI compared to the increase in the overall PPI between March 2021 and May 2022.
Following a string of historically high inflation readings, Sen. Elizabeth Warren (D-MA) argued in January at a Banking, Housing, and Urban Affairs Committee hearing that the concentration of the market “played a role” in the high inflation.
In an exchange with Jerome Powell, then a candidate for Chairman of the Federal Reserve Board, the senator asked: “[I]In more concentrated and less competitive markets, are companies generally able to raise prices and increase profit margins, all else being equal? President Powell replied:[T]he link between concentration and market power is not as clear as one might think. In some of the industries that have been concentrated, there have actually been…lower cost increases that have resulted in lower costs for consumers…so it’s not as direct.
In other words, Chairman Powell testified that the link between market concentration and a firm’s ability to raise prices is, at best, obscure.
This study examines the correlation between the producer price index (PPI) and industry concentration. Using various analytical approaches, the data shows almost no correlation between the two variables.
Additionally, the data indicates that more industries classified as highly concentrated report a smaller increase in their associated PPI compared to the increase in the overall PPI between March 2021 and May 2022.
In short, the findings of this study are consistent with President Powell’s response: There is insufficient evidence to support the claim that market concentration contributes to inflationary pressures.
Data selection and methodology
To assess Senator Warren’s claim that market concentration contributes to high inflation, this study used industry concentration ratio data from the Economic census and industry-level producer price data from the US Bureau of Labor Statistics (BLS). Both variables are categorized using the North American Industry Classification System (NAICS), which facilitated an objective method when merging the datasets.
NAICS codes vary in degree of specificity from a 2-digit NAICS code (a general sector, e.g. 22 – Utilities) to a 6-digit code (a specific industry, e.g. 335312 – Engine Manufacturing and generators). This study analyzes data at the 6-digit NAICS level.
According According to the BLS, the producer price index “measures the average change over time in the prices received by producers for domestically produced goods, services and construction. PPIs measure price changes from the seller’s perspective. If firms in highly concentrated markets can exert pricing power, this would manifest itself in an increase in the PPI, since that is where producers receive real payment for their goods and services.
US Census Bureau Industry Concentration Ratios Economic census are calculated as the share of sales between the four largest companies and rated CR4.
Correlation between market concentration and producer prices
The key finding of this study is shown in Figure 1. Each dot represents one of 263 6-digit NAICS industries with relevant data, and the dotted red line indicates the percentage change in PPI for all products during the same period. The position of each dot corresponds to the percentage change in PPI and the percentage point change in CR4 between 2002 and 2017. If the claim that increased market concentration (measured by the percentage point change of CR4) leads to higher prices (a positive percentage change in the PPI) were true, there would be a strong positive correlation. The correlation measured 0.06, suggesting a very weak relationship between market concentration and producer prices.
This study also examined the notion that the CR4 level, rather than the percentage point change, might be correlated with the percentage change in producer prices. Therefore, this study used the CR4 level of 2017 (the most recent observation of the Economic census) and the percentage change in producer prices from March 2021 to May 2022. This period corresponds to the historically high inflation that Senator Warren referred to.
If the current rhetoric is correct, there would be a positive correlation between the two variables. This means that the percentage change in PPI would increase, moving across the CR4 spectrum from 0 (perfectly competitive markets – firms are price takers) to 100 (monopoly – firm is a price maker). Figure 2 illustrates the 260 industries with related data and includes a dotted red line representing the percentage change in the overall PPI over the same period. The correlation coefficient of 0.04 suggests a very weak relationship and gives little credence to the claim that highly concentrated industries may have charged prices for goods and services that exceeded the general price increase.
Changes in the PPI at the industry level compared to the overall PPI
Using the same 260 industries as in Figure 3, this analysis shows that 134 industries (52% of the sample) experienced a PPI increase less than the 13% increase in the overall PPI between March 2021 and May 2022.
As shown in Figure 3, industries with low concentration had a greater number of industries with a change in PPI that exceeded the pace of the overall PPI. In contrast, industries with high and medium concentration levels had a greater number of industries whose PPI increased less than the overall PPI.
Breakdown of percent change in PPI by concentration ratio category
Figure 4 illustrates the distribution of percent change in PPI by concentration ratio category.
The line through the middle of each box represents the median change in PPI for each concentration ratio category. In this case, it is better to use the median rather than the mean to account for the presence of outliers in the data set.
If the statement that market concentration contributes to inflation is true, highly concentrated industries should have higher median values of the percentage change in PPI. The data shows, however, that the median value in the three categories is similar. Low-concentration industries recorded the highest median change in PPI between March 2021 and May 2022, at 13.6%. The median change for the high and medium concentration level categories was 12.5% and 12.3%, respectively.
A full description of how to interpret a boxplot can be found in the appendix.
Chairman Powell was right to assert that “the link between concentration and market power is not as clear cut as one might think”.
This study found no evidence to support the claim that increased market concentration plays a role in inflation. Neither the percentage point change in concentration ratios nor the level of industry-specific concentration ratios show a significant and positive correlation with the change in PPI.
The analysis also reveals that highly concentrated industries were more likely to experience a smaller increase in industry-specific PPI relative to the change in overall PPI and that industries with low concentration had the lowest median change. higher PPI.
Appendix: Interpreting a box-and-plot plot