In 2011, I asked the following question on a problem set:
About 140 years ago, most—maybe all—major U.S. cities had a number of beer companies that produced and sold beer just for the particular city they were in plus about a 30-mile radius.There were well over 100 beer companies, no one company sold more than about 4% of the total amount of beer sold nationally, and the top 8 companies sold less than 25% of the total amount of beer sold.
Then two things happened over the next few decades.
(1) Major U.S. cities began to be connected by railroads.
(2) Beer companies merged and consolidated: the number of beer companies fell by half.
Question: With fewer beer companies, did the beer market become less competitive than it had been before the railroads? Why or why not?
What I wanted the students to see, and many did see, is that with a decline in shipping costs, there would likely be more companies selling in a given market and so the increase in concentration nationally was irrelevant. If the consumer has more choices, then, all other things equal, the market is more competitive.
I thought of that when I came across C. Lanier Benkard, Ali Yurukoglu, and Anthony Lee Zhang, “Concentration in Product Markets,” NBER Working Paper 28745, April 1921. Here’s the abstract:
This paper uses new data to reexamine trends in concentration in U.S. markets from 1994 to 2019. The paper’s main contribution is to construct concentration measures that reflect narrowly defined consumption-based product markets, as would be defined in an antitrust setting, while accounting for cross-brand ownership, and to do so over a broad range of consumer goods and services. Our findings differ substantially from well established results using production data. We find that 42.2% of the industries in our sample are “highly concentrated” as defined by the U.S. Horizontal Merger Guidelines, which is much higher than previous results. Also in contrast with the previous literature, we find that product market concentration has been decreasing since 1994. This finding holds at the national level and also when product markets are defined locally in 29 state groups. We find increasing concentration once markets are aggregated to a broader sector level. We argue that these two diverging trends are best explained by a simple theoretical model based on Melitz and Ottaviano (2008), in which the costs of a firm supplying adjacent geographic or product markets falls over time, and efficient firms enter each others’ home product markets.
Benkard and Yurukoglu are at Stanford University’s Graduation School of Business and Zhang is at the University of Chicago’s School of Business.
Are anti-trusters in the Biden administration familiar with this important finding? Specifically, I wonder if Lina Khan, chair of the Federal Trade Commission knows this and sees its importance for the discussion of competition.