Fact of the Week: Market Concentration Remained Stable When Import Competition Is Taken Into Account

Source: Mary Amiti and Sebastian Heise, “U.S. Market Concentration and Import Competition,” Review of Economic Studies, 2024.

Commentary: In a recent The Review of Economic Studies paper, Mary Amiti and Sebastian Heise analyzed the U.S. Census Bureau’s Census of Manufactures (CMF) and Longitudinal Firm Trade Transaction Database (LFTTD) data to examine the role of foreign competition on sales concentration of U.S. producers. From these datasets, the authors found that rising foreign competition increased concentration among U.S. firms from 1992 to 2012 but overall concentration, which includes foreign firms competing in U.S. markets, remained unchanged. Indeed, they explained that rising foreign competition increased domestic U.S. firm concentration because smaller, less efficient firms exit the market and the remaining U.S. firms expand their exports. Meanwhile, overall concentration remained unchanged because foreign firms’ “entry and growth were mostly in the bottom part of the market share distribution,” meaning that they generally replaced the market shares that U.S. firms lost.

The authors also quantified the impact of foreign competition on concentration. First, they found that import competition, a proxy for foreign firm competition, had a positive and significant effect—a coefficient of 0.21—on domestic U.S. firm concentration. Moreover, they also concluded that when import penetration increased by one standard deviation, domestic U.S. firm concentration for the top 20 firms also increased by 2 percentage points. Second, the authors also asserted that import competition impacts overall concentration because it lowers the domestic sales of U.S. firms. Indeed, they found that when import penetration increased by one standard deviation, the market share of the top 20 U.S. firms also declined by 3 percentage points. From these findings, the authors also predict that import competition caused a decline of 0.8 percentage points in overall concentration from 1997 to 2012. Third, the authors show that overall concentration nevertheless remained unchanged because U.S. firms’ market share losses were replaced with a rise in foreign firms’ market shares. Their analysis found that “import competition on the top-20 market concentration measure that comprises both domestic and foreign firms is insignificant and close to zero.” Finally, the authors also found that import competition also impacts domestic U.S. firm concentration because a one standard deviation increase in import penetration means a 23 percent decline in the number of U.S. firms.

Given their results, the authors conclude by noting that overall “market concentration in the U.S manufacturing sector remained stable between 1992 and 2012,” a finding that is contrary to previous studies that only examine the sales of U.S. firms.