esteban rossi-hansberg is a professor of economics at Princeton. pierre-daniel sarte and nicholas trachter are, respectively, senior advisor and senior economist in the research department of the Federal Reserve Bank of Richmond. A version of this piece was published as a Cato Institute Research Brief. And a detailed technical version is available as NBER Working Paper 25066.
Published March 25, 2019
Much has been written — much of it in alarm — about the increase in U.S. market concentration at the economy-wide level observed over the past two decades and, in particular, the role that large firms have played in driving this trend. The evidence for the rise in concentration is uncontroversial: both the market share of the largest firms and the widely used Herfindahl-Hirschman Index of concentration have increased in most sectors since 1990.
It isn’t a big leap from there to conclude that this trend is reducing competition in product markets — and that this fall in competition is driving other problematic trends in the economy, including rising price markups, rising profits for large firms, declining market contestability and labor market dynamism, not to mention a decline in the share of income going to labor.
But note a critical (and generally overlooked) loose end in the argument. While the evidence cited on market concentration is national, most product markets still flourish or stagnate at the local level. For even in the age of Amazon and eBay, the transportation of goods and people loom as a major cost, leading most firms to set up production plants, distribution centers and stores close to customers. By the same token, the inconvenience, uncertainty and expense of shopping far from the point of consumption shields many producers from firms that are seemingly dominant at the national level.
Here, we document four critical facts regarding national and local product-market concentration in the U.S. economy between 1990 and 2014, making use of the highly detailed National Establishment Time Series dataset. The data include sales and employment numbers for plants at different levels of geographical and industrial aggregation and allow us to link each plant to the firm or enterprise that owns it.
The well-documented trend toward greater market concentration at the national level has been accompanied by a corresponding negative trend in the concentrations of markets at the local level, whether measured by Census statistical area, county or ZIP code. Indeed, the narrower the geographic definition used, the faster the decline in local concentration across the period. This is important because most local markets largely determine the degree of competition among sellers.
Local concentration is falling across a range of industries that together account for 77 percent of employment and 70 percent of sales in the United States. What’s more, among industries in which national concentration is rising, the ones in which local concentration has declined account for the majority of employment and market share (70 percent of employment and 65 percent of sales). These diverging trends are found across most sectors, but are more pronounced in services — retail trade, finance, insurance and real estate — when compared to wholesale trade and manufacturing. This ordering is natural given that transport costs are less relevant in the latter two sectors.
Together, these first two facts underscore an unmistakable decline in local concentration that is pervasive across all sectors.
Top firms have led the way. That is, excluding the top firm (in terms of national sales in 2014) from the analysis in each industry, the national increase in concentration becomes less pronounced. Less intuitively, the decline in local concentration also becomes less pronounced when the top firm is included.
This is easier to see from another perspective: while large firms have materially contributed to the observed increase in national concentration, they have also contributed to the observed decline in local concentration. In industries with diverging national-local concentration trends, large firms have become ever larger. But the associated geographic expansion of these firms, through the opening of more plants in new local markets, has lowered local concentration. This suggests that entry of big firms has increased local competition. (It’s worth noting, though, that in the considerably smaller group of industries where we observe increases in both national and local concentration, top firms have aided on increasing both national and local concentration).
Among industries with falling local concentration, the opening of a plant by a top firm is associated with a decline in local concentration at the time of the opening. Arguably, more important, this lower level of concentration persists for at least the next seven years.
This is further evidence that large enterprises do not tend to dominate the local market after they enter. Rather they lower concentration, either by competing with a firm that previously held a local monopoly or simply by adding one more competitor that grabs proportional market share from other local establishments. In any case, the notion that entry by large firms eliminates local producers to the point of increasing concentration is certainly not supported in the vast majority of industries that collectively employ the majority of American workers.
Large enterprises do not tend to dominate the local market after they enter. Rather they lower concentration, either by competing with a firm that previously held a local monopoly or simply by adding one more competitor that grabs proportional market share from other local establishments.
Connecting the Dots
Consider the much-publicized case of Walmart. Most of Walmart’s establishments are classified as being part of the discount department store industry, an industry exhibiting increasing national concentration and declining local concentration. Consistent with fact four, when Walmart opens a store, concentration falls in the associated ZIP code.
In contrast, when computing local concentration leaving out the new Walmart, concentration remains constant across the relevant period. One can also consider the effect of Walmart on the number of firms in a local market. When Walmart enters, the total number of establishments in the ZIP code generally increases — though by less than one-to-one (on average, by about three-quarters of a firm). In other words, Walmart does push some firms out of local markets, but more often than not, the net result of opening a Walmart store is a greater number of competitors in the market for at least seven years after entry.
Walmart is an important example of this phenomenon since it has considerable impact on both national and local concentration by virtue of its size and dynamism. But there are many other examples in other sectors. For example, the expansion of giant Cemex, the top firm by sales in 2014 in ready-mixed concrete, led to a similar decline in local concentration and an expansion in the local number of establishments in the industry.
Unlike researchers who are skeptical about some aspect of the conventional wisdom on the dangers of growing market concentration, we don’t challenge the view that national concentration has increased — indeed, our data reinforce the finding. We do, however, refute the casual assumption that rising national concentration implies a parallel trend in local concentration.
Both trends have implications for consumer welfare and the health of free markets. But, in our view, lower concentration is not a legitimate economic goal in itself. In the end, concentration matters because it can affect the degree of market competition. Hence measures of concentration must be aligned with product markets, as well as their geographic and industrial scope. For the majority of industries, concentration is likely more relevant to firm pricing and other strategic behavior (and thus consumer welfare) at the local level.
Our findings are also consistent with the mixed evidence found in recent research regarding trends in price markups across individual industries. If local competition matters, we should not see increases in markups or profits in the markets where local competition is increasing.
To be sure, the measurement of markups depends on important assumptions and requires very detailed data. The NETS data at our disposal does not allow us to calculate these stats for local markets. But there is evidence that markups have been flat in specific industries with declining concentration — and, strikingly, for the economy in aggregate.
We believe our findings are directly relevant to antitrust and other policies that can deter successful firms from growing at the national level. Not every industry exhibits the diverging national-local market trends we’ve documented: In some industries concentration is rising at both. However, our results are certainly robust enough to give pause to policymakers who worry that the economy is suffering from rising market power because concentration is rising at the national level.