Friday, March 22, 2019

Concentration increasing?

Is the US economy getting more concentrated or less? At the aggregate level, more. This is a widely noted fact, leading quickly to calls for more active government moves to break up big companies.

But at the local level, no. Diverging Trends in National and Local Concentration by  Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter documents the trend.

They make a concentration measure that is basically the sum of squared market shares, so up means more concentrated and down means less concentrated. This is the average of many different industries and markets.

The average concentration of national markets has gone up. But the concentration of smaller and smaller markets has gone down. More businesses are dividing up county and zip code markets.
Industries differ. This graph does not get a prize for ease of distinguishing the lines, but the two red lines just below zero are manufacturing and wholesale trade, where the industries with really dramatic reductions in local concentration are retail trade, finance insurance and real estate, and services.

What's going on? The natural implication is that the town once had 3 local restaurants, two local banks, and 3 stores. Now it has a McDonalds, a Burger King, a Denny's and an Applebees; a branch of Chase, B of A, and Wells Fargo, and a Walmart, Target, Best Buy, and Costco. National brands replace local stores, increasing the number of local stores.

However, that turns out not to be so obvious.

This graph shows what happens in the diverging industries (those in which national goes up, and local goes down) if you leave out the biggest company. Doing so, lowers the rise of national concentration, because we left out the single most concentrated firm. The lower line however, shows a positive effect. If we leave out the largest national firm, the local markets look more concentrated. If  national brands had just replaced local businesses, then when we leave them out, we should see lots of smaller shares.  The same thing happens if we leave out the second and third largest.

What's going on? Well, they look at what happens when Wal-Mart comes to town.


The lower line is the effect on concentration in the years before and after the top national firm enters a market. Concentration drops. If, when Wal-Mart came to town, all the exiting firms went under, concentration would rise. The upper line shows you concentration ignoring the largest enterprise. It's unchanged. Either the mom and pop stores do, in fact, stay in business; or new smaller firms enter along with Wal-Mart. The phenomenon is not just the replacement of all smaller businesses by a larger number of national chains.

The paper was presented at the San Francisco Fed "Macroeconomics and Monetary Policy" conference, where I am today. The discussions, by Huiyu Li and Fran├žois Gourio, were excellent. As with all micro data there is a lot to quibble with. Is a zip code really a market? Much of the data are industry+zip codes with a single firm, both before and (slightly less often) after. Maybe Walmart and other stores drag in customers from other places? And of course, concentration is not the same thing as competition. The SF Fed will, in a week or so, post the conference, papers, and discussions.

6 comments:

  1. And zero pushcart, motorcycle-sidecar or truck vendors, but maybe a few food food trucks.

    We could open up capitalism again to the ordinary fellow, if we wanted.

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  2. Why should anyone care about the concentration statistics? Implicity there is a premise that a concentrated industry makes partial "monopoly profits" and is thus "evil capitalism." This was the hypothesis of Joe Bain and I worked for Yale Brozen at Chicago GSB before it sold its naming rights to Booth. Brozen looked at Bain's data and told me aftereards that Bain seems to have cooked his data. Bain and Sen. Philip Hart (D-MI) almost enacted new antitrust legislation breaking up "concentrated" industries. In 1967, Yale Brozen (and I was a research assistant) looked at about 30 years of FTC data and found interesting results:
    First, Bain had a small sample limited in time. He found extra-normal returns to concentration. He refused to share his data with Brozen. Second, Brozen found the extra-normal returns dissipated over about 10 years and concentration did not produce sustained extra-normal returns, but seemed to stimulate more entry by competitors.

    But bad old ideas (and hidden premises) never go away, they just come back as new false leads for research.

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    Replies
    1. Joe, I also worked for Yale when I was at the GSB. 1971-1972. He Thought Bain was dishonest with the data and Stigler used a short time horizon and small sample. Later, Yale and Harold Demsetz demonstrated correlations between concentration and profits were either transitory or due to efficiency. Not anti-competitive barriers to entry. As time horizons increased, profits declined, probably because of increased competition. In 1966, the big three automakers had 89.6% of the automobile market. in 2014, their share was about 44.5%. BTW. Yale was most generous with his time. I learned more econ working and talking with him, than the micro/macro courses I took.

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  3. We could open up capitalism again to the ordinary fellow, if we wanted? What is it going to take to make that happen? Pitchforks in the streets? Hitler? Trump?

    A 2015 study by professors Kathleen Kahle and Rene Stulz, published in the Journal of Economic Perspectives, found that “over the last 40 years, there has been a dramatic increase in the concentration of the profits and assets of U.S. firms.” In 1975, 109 companies accounted for half the earnings of all public firms; by 2015, that number had dropped to just 30.

    The Economist newspaper recently described America’s economy as “a capitalist dystopia; a system of extraction by entrenched giants.”

    Private jets tax breaks, Sports stadiums, Carried interest, Financial-crisis bailouts – to name just a few issues. How much more can we subsidies the uber rich? The current system is rigged to the wealthy.

    An ode to a beautiful mind – “The Rigged Labor Market,” Milken Institute Review, by Alan B. Krueger

    Unfortunately, our politicians, on both sides, are beholden to those who pay to get them elected. Deficit spending means nothing to them. They will do and say whatever it takes to be elected.

    Historically, it usually ends badly. I am cautiously pessimistic.

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  4. How many firms are necessary for effective competition?

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  5. Jim says: it would be interesting to compare the largest urban areas with the smallest urban areas. A possible factor for the increasing number of businesses in the larger urban areas: with worse and worse traffic jams, people shop more locally to save travel time.

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