This presentation by Hiro Odagiri, Professor, Department of Economics, Hitotsubashi University, 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 oe.cd/2gw.

1. Hiroyuki Odagiri
Hitotsubashi University, Tokyo
OECD Competition Committee,
“Hearing on Market Concentration”, 7 June 2018
Market Concentration and Competition
Policy:
General Issues with an Application to
Japan

2. Two Statistics on Concentration Ratio (CR)
in Japan
 The JFTC data
 JFTC collected and published the data for 1975-2014
 The main purpose -- to inquire if there are industries in
“monopolistic situation” with CR1>50% or CR2>75%, etc.
 “Whenever a monopolistic situation exists, the JFTC may order the
relevant enterprise, …, to transfer a part of its business or to take
any other measures necessary to restore competition with respect to
the relevant goods or services, …” (AMA, Article 8-4)
 Thus biased to high-concentration industries
 Market coverage is incomplete and industry classification varies.
 The Census data (The Ministry of Economy, Industry and Trade)
 “Census of Manufacture” itself started in 1909
 But the CR data was published only in 2008 and 2010
 Basically covers all 6-digit SIC in manufacturing
 Aggregated to the firm level from the establishment-level survey
7 June 20182 Hiroyuki Odagiri @ OECD,

3. Three Problems (at least) with Every CR
Data
 Market definition or industrial classification
 SIC is not always an adequate “market” for the purpose of
competition policy (“a particular field of trade” in AMA).
 The relevant “market” can vary over time.
 “Market” may not be a good unit to measure competition
or dominance, particularly in service sectors such as the
platform-related industries.
 Coverage
 Weak in non-manufacturing sectors
 Definition of “a firm”
 Under partial ownership and common ownership, what is
a firm/company/enterprise?
7 June 20183 Hiroyuki Odagiri @ OECD,

4. Has CR Increased in Japan Generally?
7 June 2018Hiroyuki Odagiri @ OECD,4
 Perhaps “yes”, but only very gradually and with
many reservations.
 According to the Census data, between 2008 and 2010,
CR3 increased in about 1,000 industries (6-digit) and
decreased in about 700 industries
 According to the JFTC data, there is probably a slight
right-ward shift of the distribution of CR4 and HHI since
2000
 But this covers only 109 markets (99-manufacturing, 10-service)
for which the CR data is continuously available from 1991 to
2010
 Source: N. Doi, Y. Honjo and Y. Kudo “Consideration on Changes of Market
Structure of Major Industries in Japan by the Use of Mobility Index, and the
Applicability to the Competition Policy: An Analysis Based on the degree of
concentration of production and shipment,” JFTC, Competition Policy
Research Center Report, 2014 (in Japanese).

5. CR4 ─ Box Diagram and Distribution, 1991-
2010
7 June 2018Hiroyuki Odagiri @ OECD,5

6. HHI ─ Box Diagram and Distribution, 1991-
2010
7 June 2018Hiroyuki Odagiri @ OECD,6

7. Mobility (or Instability) of Ranking and
Market Share
7 June 2018Hiroyuki Odagiri @ OECD,7
 Slightly (but significantly) increased in the 2001-2010
period than in the 1991-2000 period.
 In 9 out of 10 mobility indices.
 JFTC data.
 The number of markets in the sample is small (109).
 Source: Doi, Honjo, and Kudo, ibid.

8. Mobility of Ranking (cont.)
7 June 2018Hiroyuki Odagiri @ OECD,8
 Mobility of ranking (i.e., the probability that the ranking
changes from a year to the next)
 Top firm (No. 1 changes) 0.121
 Top 2 firms (at least one of No.1 or No.2 changes)
0.263
 Top 3 firms (at least one of No. 1, No. 2, and No. 3 changes)
0.395
 The mobility is higher (i.e., market leaders are more likely
replaced) in growing industries and declining industries
than in stable or stagnant industries, and in R&D
intensive industries.
 Panel data. 1991-2010.
 The number of industries varies by year (219-396).
 The industry-years with major mergers were excluded.
 Source: Honjo, Doi and Kudo, “The Turnover of Market Leaders in
Growing and Declining Industries: Evidence from Japan,” Journal of
Industry, Competition and Trade, 2017.

9. Profit Rate Has Not Been Increasing (except in the
last few years, perhaps owing to post-2008 recovery & Abenomics)
7 June 2018Hiroyuki Odagiri @ OECD,9
 Profit before interest and tax as a ratio to sales (%)
 Source: Ministry of Finance, Financial Statement Statistics of
Corporations

10. Of Course, Horizontal Mergers Increase CR:
Some Examples in Japan
7 June 2018Hiroyuki Odagiri @ OECD,10
Industry Merger CR3 before
merger
CR3 after
merger
CR3 in
2014
Cement 5 major mergers
in the 1990s
44.4
(1993)
79.6
(1999)
68.6
(63.5)
Paper (for IT
use)
Nippon Paper &
Daishowa Paper
66.3
(2001)
75.1
(2003)
74.4
(74.4)
Chemical
(polypropylen
e)
2 business
integrations
64.7
(2002)
77.8
(2003)
86.9
(78.6)
Gasoline Shin Nihon
Sekiyu & Shin
Nikko
56.4
(2009)
64.2
(2010)
63.5
(62.3)
Lead-acid
battery
Yuasa & Nippon
Battery
71.6
(2004)
85.0
(2005)
83.2
(72.6)
Lithium-ion
battery
Panasonic &
Sanyo
89.6
(2008)
95.2
(2009)
80.4
(69.2)Note: CR3 is from the JFTC data at the production level not including imports. In
parentheses in 2014 are CR3 at the shipment level including imports.

11. Are Mergers and Increasing Concentration
Always Bad?
7 June 2018Hiroyuki Odagiri @ OECD,11
 Theoretically “yes” if we can assume a Cournot
model in a homogeneous market with no entry.
 Otherwise, the effects may not be
straightforward.
 In particular, the effects may differ significantly
between
 Declining industries, with excess capacity, and
 Growing industries

12. In Declining Industries,
7 June 2018Hiroyuki Odagiri @ OECD,12
 Mergers may give more incentives for the firms to
scrap excess capacity, thereby reducing costs and
increasing social surplus (even if consumers’ surplus
is reduced)
 A larger firm size may make a room for scrapping a part
of the capacity without causing a shortage of capacity to
meet the demand
 A larger market share means that the firm can internalize
more of the benefits from the reduction of industry
capacity
 Called “internalization of business-stealing effects” by M.
Nishiwaki who studied the cement industry in Japan (“Horizontal
Mergers and Divestment Dynamics in a Sunset Industry,” Rand Journal of
Economics, 2016)

13. In Declining Industries (cont.)
7 June 2018Hiroyuki Odagiri @ OECD,13
 Concentration may increase with or without mergers,
as
 Failing companies will exit
 Entry of new firms is unlikely
 Certainly, competition authority needs to watch lest
collusive behavior become prevalent
 The presence of excess capacity may reduce the stability
of collusive state.
 However, old industries tend to have a stable list of firms
and may have nurtured a communication network among
them.

14. In Growing Industries,
7 June 2018Hiroyuki Odagiri @ OECD,14
 Entry needs to be fostered to maintain contestability
 Entry-deterring behavior of incumbent firms has to be
scrutinized
 Acquisition by incumbents of new firms can hamper
future competition (as argued by Shapiro (2017) for instance)
 However, difficulties for competition authorities are many:
e.g.,
 New firms are likely too small for notification to be required
 The increase in HHI is limited and the safe-harbor criterion will
be satisfied
 Often, particularly in the digital and platform industries, the new
firms enter with new business models, and the combination may
be regarded as non-horizontal. Is the conventional “market
definition” still useful in such industries?

15. Declining Entry Rate is Worrisome
7 June 2018Hiroyuki Odagiri @ OECD,15
Note: Entries and exits are at the establishment level.
Source: White Paper on Small and Medium Enterprises in Japan, 2017

16. Particularly in the Promising Industries, …
7 June 2018Hiroyuki Odagiri @ OECD,16

17. New Firm Creation Should Be Promoted
from the Competition Policy Viewpoint Too
7 June 2018Hiroyuki Odagiri @ OECD,17
 Acquisition by incumbents may actually promote new
firm creation, as
 To be acquired is a profitable exit for entrepreneurs
 Acquisition may create efficiency
 By creating synergy
 By introducing managerial and technological capabilities of the
acquirer to the acquired
 Through scale and network effects
 Possibly a tough dilemma for competition authorities