The Myth of Market Concentration

Central to administrative policy, congressional legislative efforts, and the progressive view of the universe is that a recent history of increasing market concentration has left American consumers powerless. As the President said in his Executive Decree on competition: “A fair, open, and competitive marketplace has long been the cornerstone of the American economy, while excessive market concentration threatens fundamental economic freedoms, democratic accountability, and the well-being of workers, farmers, small businesses, startups and consumers. He added: “Yet in recent decades, as industries have consolidated, competition has weakened in too many markets, depriving Americans of the benefits of an open economy and widening racial inequalities, income and wealth.”

Growing concentration in US industries is such a crucial part of today’s policy dialogue that it makes sense to fact-check this area. In his first publication for AAF, Fred Ashton does just that: examines the data for evidence of increasing concentration. Specifically, it uses recently released census data (collected from 2002 to 2017) to calculate the fraction of sales represented by the top four companies in each industry. (Note: four is not a magic number. You can use many other whole numbers and get the same basic result.)

These results are shown below (which is Figure 1 in Ashton’s article). In the jargon of this field of research, CR4 is said fraction of the sales of the four main companies; NAICS (North American Industry Classification System) identifies industries, with more numbers (six versus four, for example) being a finer classification, and the threshold; and medium and high concentration thresholds set at 40% and 70%, respectively.

For example, in 2002, 9% of 6-digit industries were highly concentrated, while in 2017 the fraction was 8%.

Take a moment to examine the figure (wait, wait, wait…).

The basic result is that all bars are essentially the same length in 2002, 2007, 2012, and 2017. In other words, the concentration of the US economy WAS. NOT. AMENDED. A. BIT.

There are many, many robustness checks – different sector allocations, using more or fewer companies in the concentration ratio, etc. These do not modify the base image. However, it is important to add that this in no way excludes any competition problem. For a given concentration, there could now be driving problems that did not exist before. Or, the real market power could be in a particular geographic area that is masked by the aggregate analysis.

Despite these caveats, Eakinomics finds that those who cite growing concentration as a justification for attacking successful companies, burning existing antitrust standards, and intensifying federal micromanagement of the economy are doing the public a real disservice. Get the facts first, please.

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