Sam Peltzman on concentration in America

From the Pro-Market blog comes this short interview with Professor Sam Peltzman (Ralph and Dorothy Keller Distinguished Service Professor Emeritus of Economics at the University of Chicago Booth School of Business) on the question of concentration in American industry.

Q1: The discourse on concentration, market power, and bigness in many U.S. industries has increased dramatically in the last year. Do you believe that we have enough empirical evidence to show that concentration is on the rise and having adverse effects on the economy?

There are two questions here. We have enough evidence that concentration has increased in recent years. The best data are for manufacturing. I’ve documented the trends in that sector in a 2014 article in the Journal of Law and Economics. Briefly, concentration began rising in this sector in the late 1980s and continued doing so for the next 20-25 years. This process may still be going on. While the data for other sectors is not so good, it is likely that concentration in sectors such as retailing and services has also increased over roughly the same period.

We do not have enough evidence that this process is having adverse effects on the economy. There are some retrospective merger studies that tilt in that direction. But they are focused on a few industries. And there are many ways beyond mergers that concentration increases. There is simply no broad base of evidence that the rise in concentration has had adverse—or beneficial— effects on the economy.

Q2: In your opinion, what are the main reasons for the rise in concentration?

Again, we don’t really know. The timing of the upward trend (beginning in the 1980s) makes it tempting to implicate the relaxed antitrust policy toward mergers, which was formalized in the 1982 merger guidelines. Perhaps there is something to such a connection. But the trend is pervasive and not driven exclusively by mergers.

This raises the possibility that larger scale has just become a more efficient way of doing business. That possibility may, in turn, be related to evidence that the economy has become less dynamic, in the sense that job turnover has been historically higher for small firms than for large, so the reduced turnover seems to signify less innovation and risk taking by small firms. That can be both a symptom and a cause of growing concentration.

Q3: Which industries should we be concerned with when we look at questions of concentration?

The traditional answer, embedded in the merger guidelines, is “be concerned if concentration increases in an already concentrated industry.” The evidentiary basis for this is thin. A much older literature struggled vainly for years to find a broad pattern whereby adverse effects of concentration could be localized to highly concentrated industries. I am unaware that the state of knowledge on where we should be concerned—or indeed if we should be concerned—has improved much. Basically, antitrust policy relies more heavily on beliefs rather than a strong consensus about facts.

Q4: Has consolidation in the financial industry played a role in concentration or antitrust issues in the U.S.?

I don’t know, but my guess would be ‘no.’ The question suggests that perhaps smaller firms have had increased difficulty in raising capital. That remains to be demonstrated. There is, to be sure, a regulatory issue in that Dodd-Frank rules make it harder to grant ‘character’ (unsecured) loans and to avoid writing them down when they stop performing. This can’t help someone with little more than a good idea and a willing banker.

Q5: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

See my answer to question 3 above. It is hubris to believe that economists and antitrust officials can predict the future, which is what you need to do in this sector. Who remembers that free web browsers were once thought to be a dangerous threat to competition?

Q6: Is there a connection between the growing inequality in the U.S. and concentration, dominant firms, and winner-take-all markets?

The timing suggests so, but there are a lot of unconnected dots in this question. We do know that wage inequality across firms has increased. Larger firms have always paid more. That premium has increased. That may be symptomatic of the ‘larger firms are more productive’ view raised above in question 2.

Q7: President Trump has signaled before and after the election that he may block mergers and go after certain dominant companies. What kind of antitrust policies should we expect from him? Pro-business, pro-competition, or political antitrust?

See question 5 above. I prefer humility to hubris.