We investigate the evidence of increasing concentration in markets in Australia and overseas. We then evaluate the reasons underlying the facts and analyse what it means for competition in Australia.

1. HoustonKemp.com
Are markets in Australia and
overseas becoming more
concentrated, and is that a problem?
A review of the evidence
Luke Wainscoat and Nick Twort
Competition law discussion group, Sydney
October 2020

2. HoustonKemp.com
Are markets in Australia and
overseas becoming more
concentrated, and is that a problem?
A review of the evidence
Luke Wainscoat and Nick Twort
Competition law discussion group, Sydney
October 2020

3. HoustonKemp.com
Concern about increasing
concentration

4. HoustonKemp.com
Most sectors in the US saw an increase in market share of 50 largest firms from
1997-2007
Where did this begin?
4

5. HoustonKemp.com
Conclusion from Council of Economic Advisors
(2016)
‘Recent indicators suggest that many industries may
be becoming more concentrated, that new firm entry
is declining and that some firms are generating returns
that are greatly in excess of historical standards. In
addition, the dollar volume of merger and acquisition
activity is at record levels.’
5
more concentrated new firm entry
is declining
greatly in excess of historical standards

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Great interest in this topic since 2016
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The cruellest comparison from
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Source: The Economist, Regulators across the West are in need of a shake up, 15 November 2018

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is worried…
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Source: The Economist, Regulators across the West are in need of a shake up, 15 November 2018

9. HoustonKemp.com
Many suggestions for improvements
• New laws (eg Economist)
• More pro-active competition agencies (eg
Economist, Baker)
• More resources for antitrust agencies (Kwoka)
• More merger retrospectives (Kwoka)
• Break up large firms (Wu)
• Political mobilisation (Baker)
9

10. HoustonKemp.com
Are markets becoming
more concentrated and
profitable?
A survey of the facts

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Industry concentration has increased in the United
States
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Sales-weighted HHI also increased over the same
period
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Source: Grullon, G, Larkin, Y, Michaely, R, Are US industries becoming more concentrated?, Review of Finance, 23(4), July 2019, p 702

13. HoustonKemp.com
Autor et al (2019) also find that concentration has
increased
13
Source: Autor et al, The fall of the labor share and the rise of superstar firms, The Quarterly Journal of Economics, 135(2), May 2020, p 664

14. HoustonKemp.com
Autor et al (2019) also find that concentration has
increased
14
Source: Autor et al, The fall of the labor share and the rise of superstar firms, The Quarterly Journal of Economics, 135(2), May 2020, p 664

15. HoustonKemp.com
Autor et al (2019) also find that concentration has
increased
15
Source: Autor et al, The fall of the labor share and the rise of superstar firms, The Quarterly Journal of Economics, 135(2), May 2020, p 664

16. HoustonKemp.com
Summary of the US national concentration
evidence
• There does appear to have been an increase in
concentration in the United States at the national
industry level
• But levels of concentration do not appear to be
particularly problematic
16

17. HoustonKemp.com
National level concentration measures increased but
local measures of concentration have fallen (and the fall
increases with granularity)
17
Source: Rossi-Hansberg et al, Diverging trends in national and local concentration, April 2020, p 9
Average change in HHI since 1990

18. HoustonKemp.com
Average change in HHI since 1990
Retail concentration increased the most at national level,
but fallen one of the most at local level
18
Retail
Source: Rossi-Hansberg et al, Diverging trends in national and local concentration, April 2020, p 10

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Effect on local concentration of entry by the
industry’s top firm depends on the industry
19
‘Diverging’ industries
(eg retail)
‘Concentrating’ industries
Source: Rossi-Hansberg et al, Diverging trends in national and local concentration, April 2020, p 10
Entry of largest firm results in
persistent reduction in
concentration
Reduction in concentration
does not persist

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What’s happening to profits?
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Mean (but not median) markups have increased
in the United States
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Source: De Loecker et al, Rise of market power and macroeconomic implications, The Quarterly Journal of Economics, 135(2), May 2020, p 579

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Markup for firms with the highest markups has
increased the most
22
Source: De Loecker et al, Rise of market power and macroeconomic implications, The Quarterly Journal of Economics, 135(2), May 2020, p 579
Two-thirds of increase due to reallocation of sales to high margin firms

23. HoustonKemp.com
What does this mean for competition?
• Product markets are narrower than industries
• Geographic markets are usually narrower than
national
• Measures of concentration across industries often
use only publicly listed firms (and there may be a
long tail of private firms)
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Antitrust markets are much smaller than industries
• Werden and Froeb (2018) calculate that the volume
of commerce of the relevant markets alleged in DOJ
merger complaints between 2013 and 2015 as a
share of industry shipments in the six-digit NAICS
sector.
• They find that in most cases, the antitrust markets
accounted for less than 0.5 percent of the six-digit
NAICS sector.
24
Source: Werden, G, Froeb, L, Don’t panic: a guide to claims of increasing concentration, Antitrust magazine, April 2018, p 4

25. HoustonKemp.com
Mark-ups are not the same as economic profits
• Mark-ups are hard to measure, and some techniques
have been shown to provide answers that are not
credible
• Most measures of profits use accounting measures,
which are not economic profits
25
Source: Basu, S, Are price-cost markups rising in the United States? A discussion of the evidence, Journal of Economic Perspectives, 2019, p 19

26. HoustonKemp.com
Rod Sims (2016 & 2020) provided a mixed perspective
on concentration and competition in Australia
• “In Australia many markets are concentrated or are likely
to become concentrated as firms pursue efficiencies from
scale.”
• “The rise of large corporations in the Australian economy
has also been substantial. Indeed it seems we have
slightly outpaced the US.”
• “I think concerns over increasing concentration can be
taken too far. Many markets in Australia remain with low
levels of concentration.”
• And yesterday:
› “If Adam Smith came back to visit the planet again, it wouldn't
be what he had in mind for the invisible hand. And those
concerns are rising…We have a very concentrated economy…”
26
Source: Rod Sims, Keynote address: RBB Economics conference, 27 October 2016; AFR, Stop banks buying fintechs: ACCC, 21 October 2020

27. HoustonKemp.com
What do the data show for Australia? Most
industries are not very concentrated
27
Source: Bakhtiari, S (Department of Industry, Innovation and Science), Trends in market concentration of Australian industries,
Research Paper 8/2019, September 2019, p 8
• Distribution of HHI
suggests that “very few
Australian industries are
dominated and
controlled by a small
number of large firms.”

28. HoustonKemp.com
Median and mean HHI have increased slightly,
larger increase in more concentrated markets
28
Source: Bakhtiari, S (Department of Industry, Innovation and Science), Trends in market concentration of Australian industries,
Research Paper 8/2019, September 2019, p 8

29. HoustonKemp.com
Largest increases in HHI in relatively more concentrated
industries; largest decrease in the most concentrated
29
Source: Bakhtiari, S (Department of Industry, Innovation and Science), Trends in market concentration of Australian industries,
Research Paper 8/2019, September 2019, p 8

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Grattan Institute found that most of Australia’s
large industries are not ‘unusually concentrated’…
30
Source: Grattan Institute, Competition in Australia: too little of a good thing?, December 2017, p 13

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…but industries with higher barriers to entry are
more concentrated
31
Source: Grattan Institute, Competition in Australia: too little of a good thing?, December 2017, p 10

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Grattan found that some industries are
concentrated in Australia, others are not
32
Source: Grattan Institute, Competition in Australia: too little of a good thing?, December 2017, p 11

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Concentration has increased in retail banking, but
fallen in supermarkets
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Source: Grattan Institute, Competition in Australia: too little of a good thing?, December 2017, p 22

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Excess mark-ups represent less than 0.1% of GDP
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Source: Grattan Institute, Competition in Australia: too little of a good thing?, December 2017, p 13

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Firm creation and exit have both fallen over the
last 15 years
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Source: Grattan Institute, Competition in Australia: too little of a good thing?, December 2017, p 26

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Conclusion
• Measures of national concentration in the US have
increased, but decreased in many local industries
• Relationship between ‘industry’ concentration and
concentration in an antitrust market is not clear
• Some industries in Australia are concentrated, but
mostly don’t appear to be ‘unusually’ so, and it’s not
clear that concentration has increased across the
board
• Measures of profit not clearly pointing to a
competition issue in Australia
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Is increased concentration
leading to weaker
competition?
What conclusions can we draw from the facts?

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What if concentration and margins were
increasing together over time?
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1990 2000 2010 2020
Year
Concentration/margin
Concentration Margin
Note: example data only

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Correlation does not mean causation!
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The correlation
between
variables is 0.98

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Potential causes of correlation between
concentration and margins
• Higher margins caused by greater concentration
• Another factor caused both concentration and
margins to increase
• One factor led to higher concentration, and a
separate factor led to higher margins
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41. HoustonKemp.com
Higher margins
Weaker
competition
Greater concentration has led to higher margins
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Increased
concentration

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Higher margins
Greater concentration has led to higher margins
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Weaker
competition
Increased
concentration

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Higher margins
Greater concentration has led to higher margins
43
Weaker
competition
Increased
concentration
Bad news story

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Total market share of top four firms increased to 30
per cent in retail sector
44

45. HoustonKemp.com
Larger businesses
have higher
proportion of fixed
costs and so
higher margins
More mergers and
exits lead to
greater
concentration
Another factor could lead to greater
concentration, and so higher margins
45
Increased competition

46. HoustonKemp.com
Larger businesses
have higher
proportion of fixed
costs and so
higher margins
More mergers and
exits lead to
greater
concentration
Another factor could lead to greater
concentration, and so higher margins
46
Increased competition

47. HoustonKemp.com
Larger businesses
have higher
proportion of fixed
costs and so
higher margins
More mergers and
exits lead to
greater
concentration
Another factor could lead to greater
concentration, and so higher margins
47
Increased competition
Good news story

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profit levels for
g businesses
market shares (at
e point in time)
Another factor could lead to both increased
margins and concentration (example 2)
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More industries
with competition
for the market

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profit levels for
g businesses
Higher market shares (at
any one point in time)
Another factor could lead to both increased
margins and concentration (example 2)
49
More industries
with competition
for the market

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Higher profit levels for
surviving businesses
Higher market shares (at
any one point in time)
Another factor could lead to both increased
margins and concentration (example 2)
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More industries
with competition
for the market
Neutral story

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profit levels for
businesses
r concentration
Another factor could lead to both increased
margins and concentration
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Higher barriers to
entry

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profit levels for
businesses
Greater concentration
Another factor could lead to both increased
margins and concentration
52
Higher barriers to
entry

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Higher profit levels for
existing businesses
Greater concentration
Another factor could lead to both increased
margins and concentration
53
Higher barriers to
entry
Bad news story

54. HoustonKemp.com
Increase in
concentration
Increase in
margins
Increases in margins and concentration could be
unrelated
54
Increase in sectors of the
economy with higher
margins
Change in technologies
make it cheaper to
operate large firms

55. HoustonKemp.com
Increase in
concentration
Increase in
margins
Increases in margins and concentration could be
unrelated
55
Increase in sectors of the
economy with higher
margins
Change in technologies
make it cheaper to
operate large firms

56. HoustonKemp.com
Increase in
concentration
Increase in
margins
Increases in margins and concentration could be
unrelated
56
Increase in sectors of the
economy with higher
margins
Change in technologies
make it cheaper to
operate large firms
Neutral story

57. HoustonKemp.com
Markets should be examined separately
• The nature of competition differs across industries
› should not expect to see uniform relationship between
concentration and competition across economy
› not clear what inferences can be made by comparing
margins and concentration levels across industries
• Not necessarily a link between concentration and
market power when
› products are differentiated
› barriers to entry are low
• Need to look at sectors or markets, not the whole
economy
57

58. HoustonKemp.com
Increase in concentration of the retail sector
occurred as competition increased
58
Competition
weakened
Competition
strengthened
Source: RBA, Business concentration and mark-ups in the retail trade sector, December 2018, p 6

59. HoustonKemp.com
Clear causal link between concentration and
profits is yet to be established
‘Moreover, recent empirical arguments that competition is in decline have been
based on broad, cross-industry studies. The findings from these studies are both
problematic and incomplete, and their implications for competition remain
speculative. In contrast, the methods that the Agencies use to analyze competition
are rooted in microeconomic, empirical evidence and involve detailed analyses of
competitive conditions in specific industries. Any conclusions about the state of
competition should be made on the basis of this type of careful research.’
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Source: Economic report of the President, February 2020, p 201

60. HoustonKemp.com
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