That NAICS Code Does Not Mean What You Think It Means

In one of many iconic scenes from the movie, The Princess Bride, Inigo Montoya turns to Vizzini and says, “You keep using that word. I do not think it means what you think it means.” While this is in reference to Vizzini’s overuse of “inconceivable,” it could just as easily apply to a recent White House report which asserts that the U.S. economy has become more concentrated. The Biden-Harris Economic Blueprint, released on September 9, perpetuates long-dispelled myths about industrial concentration.

The blueprint asserts that “President Biden inherited an economy in which many important markets had become more concentrated and less competitive.” The basis for the assertion is a chart showing that the share of sector revenue accounted for by the 50 largest firms in each of 12 sectors increased between 1997 and 2007. While the chart makes a compelling visual, it provides no information about competitive conditions in the U.S. economy. The sectors the chart references are based on two-digit North American Industry Classification System (NAICS) codes. These two-digit codes divide the economy into 20 sectors and are the highest level of aggregation at which the U.S. Census Bureau collects economic data. These sectors do not constitute markets in which firms compete. As the Census Bureau shows in the table below, sectors aggregate many different industries and industries often aggregate many different geographic markets. Not only are boat dealers unlikely to compete with motorcycle dealers, but boat dealers in San Diego are unlikely to compete with boat dealers in Boston.

Table 1: Census Bureau example of NAICS code structure

But even if sectors did constitute relevant markets for antitrust purposes, the sectors referenced by the Blueprint are not terribly concentrated. Apart from the Utilities sector—which is largely comprised of regulated monopolies—the share of the top 50 firms in each of the sectors is less than 50 percent and for three-quarters of the sectors, the share is less than 30 percent. This means that, on average, each of the top 50 firms has less than one percent of total sales in each sector.

By relying on highly aggregated data, the Blueprint has completely missed the trend toward decreasing concentration in local markets. While national concentration in retail trade (as measured by two-digit NAICS codes) has been increasing, Esteban Rossi-Hansberg and his co-authors show that local concentration in retail trade has been decreasing. This decrease in local concentration is driven by the entry of large national stores (e.g., Walmart) into local retail markets thereby making local markets more, not less, competitive.

Furthermore, as ITIF has shown, disaggregating the sector data and examining national concentration at the six-digit NAICS industry level reveals that just four percent of U.S. industries are highly concentrated while the share of industries with low levels of concentration grew by around 25 percent from 2002 to 2017. Overall, U.S. industries have not become more concentrated. The average C4 ratio (the share of industry revenue accounted for by the four largest firms) increased by just one percentage point from 2002 to 2017. The more concentrated industries were in 2002, the more likely they were to become less concentrated by 2017.

Relying on the myth that industrial concentration has increased, the Blueprint touts the whole of government approach the administration has taken to promoting competition. As part of this approach, President Biden directed the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice to more vigorously enforce the antitrust laws. At the FTC, this directive has produced a never-ending review of proposed mergers, the use of prior approval provisions in consent agreements that evade statutory limitations placed on the agency by Congress, and meritless lawsuits challenging competitively benign acquisitions. These policy changes, while intended to rebuild the “economy from the bottom up and the middle out,” are most burdensome for the small businesses that the White House purports to champion. That the White House could base such a radical policy change on the myth of increasing concentration is, well, inconceivable.