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Market Concentration – WRIGHT – June 2018 OECD discussion


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This presentation by Joshua WRIGHT, Professor, George Mason University and Executive Director of the Global Antitrust Institute, was made during the discussion “Market Concentration” held at the 129th meeting of the OECD Competition Committee on 7 June 2018. More papers and presentations on the topic can be found out at

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Market Concentration – WRIGHT – June 2018 OECD discussion

  1. 1. 1 Towards a Better Understanding of Concentration: Measuring Merger Policy Effectiveness Organisation for Economic Co-operation and Development Discussion on Market Concentration June 7, 2018 Joshua D. Wright University Professor Scalia Law School at George Mason University Executive Director, Global Antitrust Institute
  2. 2. Concentration and Competition Policy: Separating Claims •  Stylized facts (?): Increasing corporate concentration in the United States and around the world •  Economic claim: Renewed assertions that concentration and economic performance are inversely related –  Increasing concentration causes an increase in market power, which in turn, results in –  Higher prices, corporate profits, and economic inequality –  Lower output, innovation, and consumer welfare •  Policy claim: Lax antitrust enforcement is the cause of this increase in concentration –  And in particular, lax merger policy and competition policy touching platforms and high-tech industries 2
  3. 3. The Evidence: Is Concentration Increasing? •  Studies finding increasing concentration in the United States have used very crude aggregation techniques: –  Furman & Orszag (2015): CR50 (revenue) measured at the 2-digit industry level –  The Economist (2016): CR4 measured using 4-digit NAICS categorization –  Autor et al (2017): CR4 & HHI using 4-digit SIC classifications 3 Source: Furman & Orszag (2015)
  4. 4. The Evidence: Is Concentration Increasing? 4 Source: The Economist (March 2016)
  5. 5. The Evidence: Increasing Market Power? •  Increased markups & profits –  De Loecker & Eeckhout (2017) estimate average markups around 20% above MC in 1950-80; 67% in 2014 –  The Economist (2016) estimates that half of firms with exceptional profits (above 10%) are found in the technology sector –  Furman & Orszag (2015) estimate that ROI at best performing firms is 10x the median, was 3x in the 90s 5 Source: De Loecker & Eeckhout (2017)
  6. 6. The Evidence: Lax Antitrust is the Cause? •  1996-2003, 52.9% of investigations in markets with HHIs of <1800 resulted in enforcement actions •  2004-2011, 2.8% of investigations in markets with HHIs of <1800 resulted in enforcement actions 6 Source: Kwoka (2015)
  7. 7. The Evidence: Type II Error in Merger Enforcement Policy? 7 Mean Price Changes, 1970s-2000s Source: Kwoka (2013)
  8. 8. Evaluating the Empirical Claims •  What do we know about whether and to what extent concentration is increasing? •  Do changes in aggregate concentration measures imply – even under the posited theories – meaningful changes in competition and welfare? –  Measurement –  Inference –  Identification •  Is lax antitrust enforcement a cause of increasing concentration? 8
  9. 9. Revisiting The Evidence: Is Aggregate Concentration Increasing? •  CR50 > 30% in more industries than in 1997 –  Average market share for firm is .6% •  2- and 4-digit SIC/NAICS level industry classifications are far too broad to meaningfully capture competition •  Does the modest increase in aggregate concentration show a reduction in competition? 9 Source: Furman & Orszag (2015)
  10. 10. The Critique: Measurement •  Aggregation obscures market-level information (e.g., Froeb & Werden, 2018) –  Broad measures (e.g., CR50) are not useful because they do not measure competitive dynamics between firms –  Product and geographic markets are often local or small 10 Source: Froeb & Werden (2018)
  11. 11. The Critique: Inference •  Higher markups are consistent with several explanations other than a rise in market power –  Change in composition to lower MC products and services; more differentiation •  Ganapati (2018) finds that industry concentration is positively correlated with productivity and real output, uncorrelated with price changes •  Shapiro (2017) finds no change in manufacturing profits (as % of GDP) over the last 20 years •  Hall (2018) finds no evidence that superstar firm intensive sectors have higher markups 11 Source: Ganapati (2018)
  12. 12. The Critique: Endogeneity •  Price/profit-concentration studies plagued with endogeneity and lack of identification – IO economists have long been skeptical of claims of causal inference arising from cross-sectional studies (e.g., Demsetz, 1973) •  Use of aggregate price-concentration studies are not adequate to make reliable inferences about intensity of competition or the desirability of changes in merger policy 12
  13. 13. The Critique: Lax Merger Enforcement •  Vita & Osinski (2016) challenge Kwoka’s methodology and conclusions –  2/3 of sample covers 3 industries (petro, airlines, and journal publishing) –  Percentage of cases with enforcement actions has increased every year since 2004 –  Only 7 mergers analyzed since 2000, of which only 1 is a potential Type II error –  Estimates of price effects were not weighted by their variances –  No reporting of standard errors for estimated average price effects 13 Source: Vita & Osinski (2016)
  14. 14. 14 •  Concentration may be increasing modestly in some highly aggregate sense, but that masks more policy-relevant market level information – Competition and concentration are different things and need to be measured differently •  Even aggregate trends seem to suggest markups and output are both increasing – hard to reconcile with a rise in monopoly power •  No clear evidence that merger policy is too lax or too stringent Summary of the Evidence
  15. 15. Competition Policy & Concentration: Where Do We Go From Here? •  Should merger policy be tightened or relaxed? Neither? – We still know little about the effectiveness of horizontal merger policy – Ex-post evaluations of individual cases are of limited use because they do not evaluate merger policy •  The bad news: We are not very close to a policy-relevant answer to those questions 15
  16. 16. Competition Policy & Concentration: A Modest Proposal •  The good news: economic tools can help us better inform this policy discussion •  What sort of evidence do we need to evaluate current merger policy? – Better identification – Better measurement – Better inference •  Much support for merger retrospectives, but economists must play an important role in research design to ensure studies generate inferences that help at the policy level 16
  17. 17. Limits of Merger Retrospectives in Policy Setting •  Determining whether the government was correct in a particular case tells us little about the optimality of merger policy – Random errors do not identify policy bias •  Merger retrospectives capable of evaluating policy require: (1) market data pre- and post-merger and 2) enforcement agency’s predictions of the merger – Antitrust community has largely focused on (1) 17 Sources: Carlton (2009); Werden (2015)
  18. 18. Improving Merger Retrospectives •  The threshold policy question should be whether the FTC / DOJ merger policy generates systematic error •  The analytical focus should be on evaluating the accuracy of the process by which enforcers make decisions, not merely outcomes – Compare the observed outcomes with the details of the agency’s assessment – Requires FTC / DOJ to record their choice of tools and model predictions throughout the assessment – Agencies are best suited to conduct these studies 18
  19. 19. Improving Merger Retrospectives •  The FTC and DOJ play a critical role in recording their assessment techniques and predictions – Agencies can conduct the analyses internally or share data with external researchers •  As Carlton (2009) observes, merger analysis has grown increasingly sophisticated, but evaluation of policy has not – The consequences of merger policy are too important to be set by popular opinion •  Rigorous policy evaluation is a heavier lift, but worth the investment 19