Not all market concentration is due to the normal expansion of businesses as they benefit from returns to scale. Firms frequently merge and acquire each other, combining their activities and pooling their market shares. The airline sector is a case in point: the top four firms served 43 percent of the market in 1985, but in 2017 that share had risen to 72 percent after decades of industry consolidation (Bureau of Transportation Statistics 2018b; authors’ calculations).*
Figure 3a shows the number of mergers and acquisitions (M&A) in the United States as a share of publicly listed companies. From 1985 to 2014 this share has increased from just 0.06 percent to 0.24 percent annually: relatively few firms merge in any given year, but the share has increased considerably. However, this increase was not matched by a similar rise in the value of M&As as a share of market capitalization, shown in figure 3b. One possibility is that M&A activity in earlier years may have removed some of the scope for high-value mergers in subsequent years.
Firms merge for a variety of reasons: to improve business efficiency, to enter new markets and access new technologies, and to acquire or maintain a monopolistic position in an industry, among others. Examining manufacturing M&A activity, one study finds that mergers raised markups (i.e., price relative to marginal cost of production), but did not enhance the productive efficiency of manufacturing plants (Blonigen and Pierce 2016).
Many mergers and acquisitions stem from the importance of technology in production processes. A 2018 survey of about 1,000 corporate executives reported that technology acquisition is a key driver of M&A deals, with 20 percent of respondents saying it is the most important. Executives also placed a high priority on “expanding customer base in existing markets” (19 percent) and “expand/diversify products or services” (16 percent; Deloitte 2018).