Market concentration has increased broadly throughout the economy. It is difficult to trace the underlying economic and policy factors that produced this increase, but it is instructive to examine selected markets where a few firms are dominant.
In several of the markets shown in figure 2 concentration appears to be related to returns to scale and network effects. For example, in “search engines,” “wireless carriers,” and “delivery services,” there are clear cost savings from large scale. High fixed costs—the infrastructure and technological expertise necessary to maintain a quality service—can be spread across many customers. Consequently, the respective top two firms of each market command 87 percent of the search engine market, 69 percent of the wireless carriers market, and 76 percent of the delivery services market.
In other markets customers derive direct benefits from the participation of other customers: a social media platform is effective only if it connects users. This connection generates powerful network effects, and the top two firms in this market account for two-thirds of total user visits.
However, the link between network effects and market concentration is not unchangeable: it depends on choices made by businesses and policymakers. For example, the 1996 Telecommunications Act required incumbent carriers to interconnect their services with competitors on nondiscriminatory terms, thereby muting network effects that might otherwise have prevented competition (Noam 2002).
Importantly, estimates of concentration can be sensitive to how markets are defined. In some cases, defining a narrower local market (e.g., subscriber TV in southwest Ohio) will lead to a different assessment of which firms are dominant, and by how much.
