Firm concentration is rising, particularly in retail and finance.
Jun 13, 2018
Economists and antitrust policymakers have long used a simple formula to assess the concentration in a market: the Herfindahl-Hirschman Index (HHI). After defining the boundaries of a market and calculating each firm’s share (e.g., of total sales), the HHI is calculated by summing the squared market shares of all firms, then multiplying the sum by 10,000.
In figure 1 we show the calculations of economists David Autor, David Dorn, Lawrence Katz, Christina Patterson, and John Van Reenen, who measure HHI for each narrowly defined industry, then take averages for much larger sectors like manufacturing and services (Autor et al. 2017). A number of sectors—most notably retail, finance, and utilities—show considerable increases in concentration. Manufacturing shows less growth, but industries within manufacturing tend to be highly concentrated. Even the service sector, which has a low average level of concentration, has seen considerable growth over the past three decades (47 percent). Other research tells a similar story, finding that over 75 percent of U.S. industries have registered an increase in concentration levels over the past two decades (Grullon, Larkin, and Michaely 2018).
However, it is possible that nationwide measures do not draw the most relevant boundaries for competition analysis; existing data allow for only imperfect estimates of concentration. Some researchers and policymakers contend that even the narrowest available industry data are too aggregated to be useful for examining concentration (Werden and Froeb forthcoming). If the relevant market is in fact much smaller or more regionally limited than the observed industry, concentration could be higher or lower than the data suggest. Nevertheless, industry-level HHI, like the measures of revenue concentration of the top 4 or top 50 firms in an industry, show a national economic landscape increasingly dominated by a set of larger firms. Other data—for example, rising profit shares or detailed market HHI—for assessing whether this concentration implies problematic market power can provide complementary evidence.
A few factors can drive increasing concentration: scale and network effects may tilt industries toward larger firms, mergers may generate fewer larger firms, or a declining start-up rate may leave fewer challengers to the incumbents. The next three facts describe why concentration might be rising.