Over the past several years, many scholars, activists, pundits, and policymakers have asserted that market concentration has risen across the U.S. economy, leading to a decline in competition. The culprit, they claim, is poorly crafted antitrust laws and lax enforcement, which have allowed firms to grow excessively through mergers. Increased concentration in turn is blamed for several economic and social ills, including slow productivity growth, excess profits, stagnant wages, and business political power. These claims have underpinned calls for a radical restructuring of antitrust policy, including imposing much stricter limits on mergers and breaking up leading companies.
Newly released data on concentration ratios from the U.S. Census Bureau’s 2017 Economic Census provides a way to assess claims about increasing concentration by comparing it to 2002 data. The U.S. Census Bureau released the concentration of largest firms for 2017 on December 3, 2020. The data largely rebuts these claims:
- Just 35 of 851 industries (4 percent) were highly concentrated, with the top-4 firms (the C4 concentration ratio) holding more than 80 percent of the market.
- In 2017, 80 percent of U.S. business output was from industries with low levels of concentration, with that share increasing from 62 percent in 2002.
- Fifty-five percent of industries increased concentration between 2002 and 2017; 45 percent decreased.
- The average C4 ratio increased by just 1 percentage point between 2002 and 2017, from 34.3 percent to 35.3 percent, while the average C8 ratio increased even less, from 44.1 percent to 44.7 percent.
- There was a slight negative correlation between the C4 level in 2002 and the percentage point change in C4 between 2002 and 2017.
- Among the industries with increases in concentration, only one-third increased by greater than 10 percentage points.
- Of the 20 industries showing the greatest increase in the C4 ratio from 2002 to 2017, only 30 percent had C4 ratios above 80 percent in 2017.
- Of the 115 industries with a C4 ratio of 60 percent or more in 2002, the majority got less concentrated, with the average C4 declining 4 percentage points.
- For every advanced technology industry with a C4 ratio over 80 percent, there were 10 with a C4 ratio below 50 percent.
- Producer prices rose less from 2002 to 2017 in industries with higher levels of concentration than overall prices.
In short, to paraphrase Mark Twain, the reports of the death of competition are greatly exaggerated.
The “fact” of rising concentration, and even monopoly, has been picked up and commented on by a larger number of pundits and commentators. Brookings’ analyst David Wessel wrote, “There’s no question that most industries are becoming more concentrated. Big firms account for higher shares of industry revenue and are reaping historically large profits relative to their investment.”The Economist concluded that two-thirds of the economy’s roughly 900 industries had become more concentrated between 1997 and 2012. Former chairman of the Council of Economic Advisors Jason Furman testified that market concentration has increased since 1997.
Paul Krugman wrote that “growing monopoly power is a big problem for the U.S. economy.” New York Times columnist Eduardo Porter stated, “There is plenty of evidence that corporate concentration is on the rise.” Economist Joe Stiglitz wrote that a “deeper and more fundamental problem is the growing concentration of market power.” The neo-Brandeisian advocacy group Open Markets has referred to “America’s concentration crisis.” And the Center for American Progress has written about “America’s monopoly problem.”
These claims have motivated hearings and potential legislation to reform antitrust. Senator Amy Klobuchar (D-MN), chairwoman of the Senate Subcommittee on Competition Policy, Antitrust, and Consumer Rights, wrote, “We are seeing higher levels of market concentration across our economy, partially driven by waves of corporate consolidation.” Congressman David Cicilline (D-RI), chairman of the House Antitrust Subcommittee, has warned that America has a “monopoly problem.” Lina Khan, who has been nominated by the Biden Administration to serve as an FTC commissioner, has alleged that the United States faces a “sweeping market power problem” as a result of relaxing antitrust law.
It has become an article of faith that concentration has increased to problematic levels and that this supports wholesale and even radical changes in U.S. antitrust policy.
The Biden-Sanders unity task force released a list of recommendations in August 2020. They proposed a “Tackling Runaway Corporate Concentration,” which emphasized,
Democrats are concerned about the increase in mega-mergers and corporate concentration across a wide range of industries, from hospitals and pharmaceutical companies to agribusiness and retail chains. We will direct federal regulators to review a subset of the mergers and acquisitions that have taken place since President Trump took office, prioritizing the pharmaceutical, health care, and agricultural industries, to assess whether any have increased market concentration, raised consumer prices, demonstrably harmed workers, increased racial inequality, or reduced competition, and assign appropriate remedies. Democrats will direct regulators to consider potential effects of future mergers on the labor market, on low-income and racially marginalized communities, and on racial equity. And as a last resort, regulators should consider breaking up corporations if they find they are using their market power to engage in anti-competitive activities.
In other words, it has become an article of faith that concentration has increased to problematic levels and that this supports wholesale and even radical changes in U.S. antitrust policy. Former member of the Council of Economic Advisors under President Obama, Carl Shapiro, summed up this view in 2017:
Somehow, over the past two years, the notion that there has been a substantial and widespread decline in competition throughout the American economy has taken root in the popular press. In some circles, this is now the conventional wisdom, the starting point for policy analysis rather than a bold hypothesis that needs to be tested.
This report tests that hypothesis with Census Bureau data.
One way to test this hypothesis is with data. Some scholars have tried to evaluate whether concentration has risen. However, antitrust experts question the basics from many of these analyses, because definitions of the relevant market are debatable. To be fair, it is difficult to measure market power. Competition can differ at national and local levels. Imports have to be considered, which will lower measured concentration in many traded sectors. Potential entry, including from disruptive technologies, also needs to be factored in. And firms can compete with each other even if they are in different industries as defined by the federal government. As such, antitrust law has stressed for the last 40 years that concentration ratios (the share of sales in a particular industry accounted for by a certain number of firms) can never substitute for the detailed economic analysis of specific markets.
Nonetheless, concentration ratios are a foundational set of data that can be used to look at the overall economy-wide state of and change in concentration and competition. The most common measure is from the U.S. Census Bureau, which as part of its quinquennial economic census releases sales data for the 6-digit NAICS industries (e.g., NAICS code 332913 Residential electric lighting fixture manufacturing) consisting of over 850 industries and details the share of sales of firms accounted for by the top 4, 8, 20, and 50 firms in the industry (known as the C4, C8, C20, etc. ratio).
Our choice of granular industry classification (6-digit NAICS industries) is not random. The more detailed the industry classification for market power analysis, the better. For example, using 3-digit or 4-digit NAICS codes, which many have done, is questionable, as it is difficult to argue that a toaster (NAICS code 335210 Small Electrical Appliance Manufacturing) competes with an oven (NAICS 335220 Major Household Appliance Manufacturing), since both goods are classified in the same 4-digit NAICS code (3352 Household Appliance Manufacturing). Examples of 4-digit versus 6-digit NAICS codes are abundant (e.g., NAICS 333241 Food Product Machinery Manufacturing and 333242 Semiconductor Machinery Manufacturing are both in 3332 Industrial Machinery Manufacturing). Analyzing at the 3-digit level of NAICS code is even more problematic, as it is not imaginable that Animal Food Manufacturing (NAICS code 3111) competes with Dairy Product Manufacturing (NAICS 3115) if the relevant market considered is Food Manufacturing (NAICS 311).
Another challenge to an accurate assessment is what to measure, or absolute share numbers of change. Those that claim that monopoly (a misused term, since it implies one firm controls virtually all of a given market) has become a problem simply measure the number of industries with rising concentration. Take an industry wherein the C4 ratio in the base year is 8 percent (each of the top 4 firms has an average of 2 percent of the market). In the most current year, it rises to 12 percent. Now, while the industry has become more concentrated, the top 4 firms average just 3 percent of the market—far from market power.
Yet, those who want to paint a story of a dangerous growth in monopoly do not bother to mention that increases from a low level to another low level are meaningless from a concentration perspective. For instance, Grullon et al. cited the rise of concentration in Furniture and Home Furnishings retailers (NAICS code 442) within the four largest players as an alarming warning because their share increased 200 percent from 1997 to 2012, yet the concentration went from 6.5 percent to just 19.4 percent. In other words, on average, the top four firms had less than 5 percent of the market each. The real issue is not whether industries are becoming more concentrated; it is whether industries are moving from being unconcentrated to concentrated.
Comparing sectors in one period to the next using Census data requires harmonizing the 6-digit NAICS codes over time, as there is always a change in the classification from one Census to another. Using the concordance available at the U.S. Census Bureau between two immediate Census years, the Information Technology and Information Foundation (ITIF) created a concordance between 2002 and 2017. For example, the industry classification for Internet Publishing and Broadcasting and Web Search Portals (NAICS code 519130) in 2017 included two industries considered in 2002: Internet Publishing and Broadcasting (NAICS code 516110) and Web Search Portals (NAICS code 518112). To combine these two industries in 2002 into one, ITIF used the weighted average of the concentration ratio using total revenue.
An additional challenge is that while Census includes all domestic producers, it does not include imports, which take market share from domestic producers. This overstates concentration ratios in most traded goods and services markets and likely overstates the growth because the share of gross domestic product (GDP) imports grew from 13 percent in 2002 to 15 percent in 2017. For example, Covarrubias et al. found that the weighted average C8 ratio for high-import manufacturing industries rose by 6.7 percentage points from 1997 to 2012. However, adjusting for imports reduces the rise to just 1.6 percentage points.
The issue is not whether industries are becoming more concentrated; it is whether industries are moving from being unconcentrated to concentrated.
ITIF examined C4 concentration ratios for 2002 and 2017 at the most detailed 6-digit NAICS code level. A C4 concentration ratio of 50 percent, for example, would mean that the top four firms hold an average of 12.5 percent of the market each. While there is no hard-and-fast definition, generally C4 ratios above 80 percent are considered high in concentration, ratios of 50 to 80 percent medium, and below 50 percent low.
Census collects and reports data on 851 industries for both years. Some industries, such as Construction and Mining, are not listed in one year but are in the other. Some industries do not have sales data because Census does not want to divulge proprietary information. Nevertheless, industries covered in this report represent more than 90 percent of the total private sector output in the United States.
Concentration in 2017
In 2017, 643 industries (76 percent) were unconcentrated with less than a 50 percent C4 ratio (see figure 1). A total of 173 (20 percent) were moderately concentrated with a C4 ratio between 50 percent and 80 percent. And just 35 industries (4 percent) were highly concentrated with a C4 ratio of 80 percent or more. Even at 80 percent, this means the top four firms had only 20 percent of the market share if they split it into equal shares.
Figure 1: Count of C4 concentration in 2017 NAICS codes
Changes in Concentration: 2002–2017
On average, concentration increased only 1 percentage point between 2002 and 2017 after taking the simple average across all industries of the differences between C4 from both years (34.3 percent in C4 from 2002 and 35.3 percent in C4 from 2017). Given that industries with C4 ratios below 50 percent are considered unconcentrated, this is a very low number. The concentration of the eight largest firms (C8) increased even less, from 44.1 to 44.7 percent. Even considering the eight largest firms, the concentration ratio remained lower than 50 percent.
Overall, 467 sectors (55 percent) increased in concentration, while 384 (45 percent) decreased (see figure 2). Again, this is hardly evidence of widespread growth of monopoly. Moreover, among the sectors that saw an increase, only 152 (18 percent of the total) increased by more than 10 percentage points.
Figure 2: Count of percentage-point change in C4 concentration in 6-digit NAICS code industries (2002–2017)
On average more concentrated industries got less concentrated from 2002 to 2017.
Another way to assess trends in concentration is by looking at whether the increases in C4 ratio were mostly in industries with already high C4 ratios in 2002. In other words, did the concentrated get even more concentrated? Figure 3 presents this relationship, with the y-axis showing the percentage-point change in the C4 from 2002 to 2017, and the x-axis presenting the level of C4 in 2002. The trend line is negative (correlation coefficient of -0.23), indicating that, on average, more concentrated industries got less concentrated from 2002 to 2017. Even the outliers with higher C4 increases were in industries with lower levels of concentration in 2002. With these two outliers removed, the relationship is still negative at the same magnitude (-0.23).
Figure 3: Relationship between C4 ratio in 2002 and percentage-point change in C4 (2002–2017)
If policymakers are concerned about the growth of market power, as opposed to simply the growth in concentration, the key is to examine industries exhibiting higher concentration ratios; in this case, with C4 ratios of 60 percent or higher. Only 94 industries (11 percent) saw an increase in concentration that produced a C4 of 60 percent or more (and even at 60 percent, if each firm held an equal market share, this would mean that each firm had just 15 percent of the market).
Looking at the 115 industries that had a C4 ratio of at least 60 percent in 2002, 55 percent saw a reduction in concentration ratio (see figure 4). On average, these industries saw a decline of 4 percentage points in their C4 ratio. Thirty-nine industries experienced a reduction of 10 percent or more, and 24 saw a decline of more than 0 percent to 10 percent. In contrast, only 13 percent of the industries showed an increase of more than 10 percentage points. In other words, more sectors with higher C4 ratios in 2002 lost market share than sectors that gained.
Figure 4: Count of percentage-point change in C4 concentration in NAICS codes (2002–2017) for 2002 C4 values greater than 60 percent
Highly Concentrated Industries
Some industries clearly got less concentrated, while others got more. Table 1 shows the 20 industries with the greatest increases in C4 ratio. Only 30 percent had C4 ratios above 80 percent in 2017. And even for some of them, there was little risk of firms exerting much market power. For example, industries such as other performing arts companies, luggage and leather goods stores, geothermal power generation, and paint and wallpaper stores all face significant competition from firms in other industries such as movie theaters, department stores, and natural gas power generation.
For some other industries, the U.S. trade balance deteriorated, meaning that imports took a larger share and provided more competition. This includes newsprint and electrical lighting manufacturing, in which the United States is the largest importer (importing 20 percent of the total international trade for both industries). For other industries, such as taxi service and travel agencies, the Internet enabled significant economies of scale and cost reductions, such as with the rise of Uber and Lift for taxis and Travelocity and Expedia for travel.
Finally, in a number of industries, technology has created new competitors for these industries. Over-the-air radio stations now compete with satellite radio and smartphones. The dramatic improvement of digital cameras has reduced the market for photofinishing laboratories, likely having caused consolidation as the market shrank.
Table 1: Top 20 industries with the highest percentage-point increase in the C4 ratio from 2002 to 2017
Table 2 lists the 20 industries with the highest concentration ratios in 2017. Fourteen were highly concentrated in 2002, with six joining them by 2017. And of the industries with a C4 ratio above 80 percent, many of them were naturally concentrated. For example, it’s hard to imagine why it would be more optimal for the guided missile and space vehicle industry, computer storage device manufacturing, or aircraft manufacturing to be less concentrated because of the enormous investments needed in research and development (R&D) and production to be successful. Others, such as HMO medical centers and warehouse clubs, and home centers, may be concentrated, but faced competition from other industries (doctors’ offices and other retailers, respectively). Other industries on the list faced technological competition. Passenger car rental faced competition from ride-sharing and also from personal rental companies such as Zip Car.
Table 2: Top 20 industries with the highest C4 ratio in 2017 and their percentage-point change since 2002