Fact of the Week: Productivity and Market Concentration Are Positively Associated in Most of the Core Economies in Europe
Source: Tommaso Bighelli et al., “European Firm Concentration and Aggregate Productivity,” Journal of the European Economic Association 21, no. 2 (April 2023): 455–483.
Commentary: In a recent paper for the Journal of the European Economic Association, Tommaso Bighelli et al. analyzed the relationship between firm concentration and productivity for 15 European countries from 1999 to 2017. Specifically, the authors used the Herfindahl-Hirschman Index (HHI) to measure market concentration and used value-added per worker for aggregate productivity. Their findings have important implications for antitrust policy and enforcement.
The study found that firm concentration, in the aggregate, increased 43 percent over the period studied. The other initial finding was that increasing concentration was concentrated mainly in manufacturing, while falling by 30 percent in non-manufacturing industries. When looking at each country separately, the study found that the relationship between concentration and productivity was negative in only three of the 15 countries. In the remaining 12 countries, the relationship between concentration and productivity was either positive or not statistically significant. Specifically, the authors modeled the relationship with concentration as the dependent variable. In particular, a 1-unit increase in aggregate productivity was associated with a 0.03 unit increase in the HHI for manufacturing, a 0.03 unit increase in the HHI for ICT industries, and a 0.06 unit increase in the HHI for professional, scientific, and technical services. The authors attribute these findings to the existence of a “winner-takes-all” mechanism. It is not necessarily the case that rising market concentration is the result of greater market power. Rather, it is more likely the case that rising market concentration is the result of higher productivity among top-performing firms in a given industry.