Industrial Concentration

8/3/2019 Industrial Concentration

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Industrial Concentration

BIBLIOGRAPHY

Industrial concentration, influencing as it does the competitive nature of private enterprise, hasbeen of interest as long as the market economy itself. The normal interest has been stimulatedfrom time to time by ascendance of various theories of history predicting that economies based

on private enterprise must contain an inherent drift toward

increasing economic concentration. Marx, for example, saw not only universal monopoly but

also extreme concentration of wealth and income as ultimate and inevitable results of capitalism.Similar theses have come forth from non-Marxist sources, particularly during the 1930s, when

some observers discerned a steady decline of competition woven into the fabric of history andblamed it for many of the ills of the great depression.

The issue of economic concentration as it has emerged is essentially twofold in nature. On theone side, there is the question of industrial concentration, of the degree to which a few firmsdominate the output of industries taken individually. On the other side, there is the question of

inequality of wealth and income in the economy as a whole. [SeeIncome Distribution, articleonsize;National Wealth, article onDistribution.] We shall be concerned here only with

concentration in the first sense.

Concentration indexes. The pattern of concentration in an industry is usually shown by aconcentration curve, each point of which represents the concentration ratio (the percentage of

total output, employment, or similar size variable) associated with the corresponding number offirms arrayed from largest to smallest, the firms being plotted on the horizontal axis (see Figure

1). By construction the curve will rise to the right at a nonincreasing rate and generally at adecreasing rate throughout. That is, it will generally be convex upward. The more unequal the

firm sizes are over any range, the more convex the curve will be. Hence the shape of a particularcurve is defined by two parametersthe degree of inequality in firm size and the number of

firms.

Although it is not normal practice to do so, the

concentration curve could equally well be plotted against the number of firms arrayed from

smallest to largest, in which case the curve would generally rise at an increasing rate (see Figure2). Constructed in this way, the concentration curve is easily transformed into the well-known

Lorenz curve by substituting relative for absolute numbers of firms on the horizontal axisthatis, by dividing the horizontal scale by the total number of firms (see Figure 3).

If the observed size distribution of firms in an industry fits well into a standard statistical

distribution, a Lorenz curve is directly derived as the relation between the cumulativedistribution function and first-moment distribution function of that cumulative distributionfunction. In such a case, the concentration curve can be reproduced if the parameters of the

distribution function are known along with the total number of firms. Observed density


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distributions of firm size are almost always unimodal and skewed upward: firms are clusteredabout a relatively limited range of sizes with a longer taper toward the larger sizes than toward

the smaller ones. It is reasonable to suppose that this characteristic shape results at least in partfrom a stochastic growth process, and some economists have therefore tried, with varying

degrees of success, to approximate observed size distributions by lognormal, Yule, Pareto, and

similar distributions that can be generated by stochastic processes (Hart & Prais 1956; Hymer &Pashigian 1962; Mansfield 1962; Quandt 1966; Shepherd 1964, pp. 208-209; Simon & Bonini1958). Even if good fits could always be obtained, it would be prohibitively expensive, in terms

of both collecting and processing data, to analyze an economy of any size in this way. Moreover,a collection of curves would mean little without some theoretical framework for interpreting

them. Unfortunately, no systematic theory of industrial structure has yet emerged from studies ofthis type to command broad agreement among professional economists. In the absence of such a

theory, measures of industrial concentration are generally confined to descriptive indexes notamenable to formal statistical analysis. A standard comprehensive measure of this nature is the

Herfindahl indexthe summed squares of firm sizes, with the sizes expressed as proportions ofthe total industry size. In mathematical language,

whereNis the number of firms, S is the total size of the industry (the summed sizes of the firms),

Si is the size of firm i, and is the mean size of firm (S/N). In other words, the Herfindahl indexis the squared coefficient of variation plus one, the sum divided by the number of firms. If all

firms are of equal size (-20), the index is the reciprocal of the number of firms, reaching itsmaximum value of unity under monopoly. For any given number of firms greater than one, the

index increases with the coefficient of variation. Since it is generally impractical to compile allthe data needed for the comprehensive Herfindahl index, a partial index is normally computed

from data for some fraction of the leading firms.

Restrictions on disclosure of information about individual firms, a normal condition for most

statistics collected and published by Western governments, also place limits on the kinds ofindexes of concentration that can be computed. The practice followed in official sources in theUnited States is not to reveal data for fewer than four firms at a time. In Canada and the United

Kingdom, the minimum number is three. Points on concentration curves based on officiallypublished statistics are therefore defined at best for only every third or fourth firm. Researchers

may, of course, be given access to more detailed data, but any published results must conform tostandard disclosure rules.

For the various reasons discussed, it has become common practice to describe industrialconcentration with a few simple indexes that summarize the concentration curve only in part.

These include concentration ratios for specified numbers of firms in multiples of three or four,areas under portions of the concentration curve, partial Herfindahl indexes, and occupancy

counts. The last is the inverse of a concentration ratio, giving the number of leading firmsrequired to account for a specified concentration ratio. For example, the 80 per cent occupancy

count is the number of firms, arrayed from largest to smallest, that together make up 80 per centof the size of the industry. In studies of U.S. and Canadian manufacturing industries, it has been

found that the various partial measures all yield about the same rank order of industries in termsof concentration (Universities-National Bureau Committee for Economic Research 1955, pp. 64-

69).


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Concentration and monopoly. Given the current state of economic theory and leaving asideproblems of identifying industries, one should not expect any simple correlation between pricing

behavior and degree of concentration as reflected by the described indexes, except in extremecases. Perhaps the most that can be said is that the higher the concentration, the more likely an

industry will behave monopolistically, and the lower the concentration, the more likely it will

behave competitively.

There are difficulties even with this broad conclusion, depending on the index being used to

measure concentration. For example, suppose two industries show the same high concentrationratio for the four leading firms but industry B has twice as many firms as industry A. The

Herfindahl index may not be smaller for B than for A, since differences in inequality of firm sizemay counterbalance differences in number of firms. Put the other way around, even though two

industries have the same Herfindahl index, the numbers of firms, partial concentration ratios, andinequalities of firm size may differ in many possible ways.

The meaning and significance of concentration indexes are affected by practical as well as

conceptual problems. Foremost is the difficulty of identifying industries so that they will berelevant for economic analysis and consistent with available data. In the first place, systematic

and comprehensive statistics on industrial structure are limited primarily to the areas ofmanufacturing, mining, and public utilities. Most studies of concentration therefore deal only

with these areas and, in fact, almost exclusively with manufacturing.

In the second place, the systems of industrial classification used in basic statistical sources,

especially in census-type materials, are not designed primarily for analysis of pricing behavior.Establishments and products are grouped together mainly on the basis of technological, not

economic, characteristics. Moreover, the accuracy of data aside, special technical difficulties inanalyzing data may arise because of the way in which data are classified into industrial

categories. For example, an industry may be defined on an establishment or on a product basis,or on the first basis for some purposes and the second for others. If defined on an establishment

basis, value of output and similar data represent the total for all commodities produced byestablishments assigned to the industry, assignment being based on the commodity of principal

value in the establishment in question. If defined on a product basis, value of output representsthe value of those commodities assigned to the industry, no matter where producing

establishments are assigned. For analysis of industrial concentration, statistics should generallybe compiled on a product basis, but this is not always possible. A final problem exists in

matching firms with industries, a procedure that normally requires access to unpublished data.

In the third place, the scope of industrial categories usually affects the height of concentrationindexes. The more narrowly industries are defined, the higher concentration indexes are likely to

be. Concentration indexes should not, therefore, be interpreted without regard to the generalscope of industrial categories. Although elaborate industrial classification systems have been

evolved in many Western countries, a given level of classification (for example, the four-digitlevel) need not mean a comparable scope for all included categories. Indeed, it is not at all clear

what is meant by a comparable scope, even though the desirability of some suchstandardization is apparent.


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In the fourth place, statistics are usually compiled on a national basis, whereas relevant marketareas are sometimes smaller or larger, differing from one industry to another[see Markets and

industries]. Concentration indexes computed on a national basis may or may not be meaningfulfrom the point of view of pricing policy, depending on the circumstances for particular

industries.

For all these reasons, one must take care in attributing specific degrees of monopoly, whateverthat might mean, to specific concentration indexes. At the same time, both very low and very

high indexes, applied to relevantly defined industries, convey useful information on likelypricing behavior. Similarly, significant differences in levels of concentration for the same

industries over time or among countries at the same time provide important evidence on likelydifferences in pricing behavior.

Comparative levels of concentration. A number of important studies of industrial concentration

have been conducted over the last three decades, covering the United States, the UnitedKingdom, Canada, and Japan; less extensive studies have been made for Sweden, France, Italy,

and India (see bibliography and Bain 1966, pp. 183-200). These studies have focused primarilyon manufacturing, measuring and analyzing concentration in a variety of ways. The findings

cannot be adequately summarized here, but a few broad generalizations can be drawn from them.

In recent years, between 14 and 18 per cent of national income in the United States has

originated in highly concentrated industries, high concentration being defined in general by afour-firm concentration ratio of 50 per cent or more for industries at the four-digit level of

classification (Einhorn 1964, p. 13). In manufacturing alone, the fraction of income originatingin highly concentrated industries is 32 to 35 per cent (ibid., p. 26). For roughly the same years

and for the sector of manufacturing alone, a greater extent of concentration is clearly shown bythe evidence for Canada (Rosenbluth 1957, pp. 75-93), less clearly by the evidence for the

United Kingdom (Universities-National Bureau Committee for Economic Research 1955, pp. 70-77; Shepherd 1961). In the case of Japan, the degree of concentration is now generally higher

than in the United States for manufacturing industries that can be matched with U.S.counterparts, but the extent of concentration is roughly the same as in the United States in both

manufacturing and the economy as a whole (Rotwein 1964, pp. 275-276).

In studies of manufacturing, concentration has been found to be inversely related to size ofindustry: larger industries generally have smaller concentration indexes and vice versa. This

relation being taken into account, concentration also shows a significant direct relation toaverage firm size but no significant relation one way or the other to inequality of firm size within

an industry.

Trends in concentration. Although there has been considerable interest in the question ofindustrial concentration for many years, systematic evidence on trends in concentration has beencollected and analyzed only over relatively recent years. So far, it has been possible to study long

trends only in the case of the United States. Changes in concentration in British manufacturingbetween 1935 and 1951, a short period for most purposes, have also been examined with

inconclusive results.


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The safest conclusion to draw from the studies of the United States is that there has been nopronounced trend in concentration either way. When due allowance is made for all the infirmities

and incomparabilities of the measurements, there appears to be a rough stability in the fraction ofnational income originating in highly concentrated industries throughout the economy over the

period from 1899 to 1958 (Nutter 1951; Einhorn 1964; Shepherd 1964). The same conclusion

holds for the manufacturing sector taken alone.

Beneath the stability lies a rapid turnover, displacement, and replacement of industries. While

some industries are becoming more highly concentrated, others are becoming less highlyconcentrated in roughly equal measure. Stability results because young and rapidly growing

industries tend to become less and less concentrated while old and slowly growing (or declining)industries tend to become more and more concentrated. Why the two forces have managed to

come so close to balancing themselves is another of the many unexplained mysteries of history.

Causes of concentration. Evidence collected so far would seem to assign an important role totechnological factors, determined within the existing regime of patents and similar constraints, as

causes of industrial concentration. For instance, comparison of U.S. and Canadian manufacturingshows a similar ranking of industries by both degree of concentration and number of firms,

indicating similar technological conditions. But Canadian industries are generally moreconcentrated than their U.S. counterparts, despite the fact that they are characterized by less

inequality in firm size. The greater concentration, therefore, seems attributable in general to asmaller number of firms in each industry, the result of smaller markets under the given

technological conditions (Rosenbluth 1957, pp. 75-93).

The dominant role of technology is further shown by the normally high negative correlation

within a country between concentration and size of industry, and the normally low correlationbetween concentration and inequality of firm size. Moreover, when concentration in an industry

is high (or low) in terms of firms, it is ordinarily also high (or low) in terms of plants.

Other factors are no doubt important in explaining industrial concentration, but they have notbeen clearly isolated by statistical analysis. Some suggested causal factors have been rejected:

the durability of commodities and the nature of purchasers (whether businesses or households)do not have a systematic relation to degree of concentration in an industry. While it seems

reasonable to suppose that legal constraints such as antitrust laws have an important effect onconcentration and its trend, we do not yet have quantitative estimates of that importance.

G. warren Nutter

[See also Antitrust Legislation; Economies of scale; Oligopoly.]

BIBLIOGRAPHY

Adelman, M. A. 1951 The Measurement of Industrial Concentration. Review of Economics and

Statistics 33:269296.


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Bain, Joe S. 1966 International Differences in Industrial Structure: EightNations in the 1950s.New Haven: Yale Univ. Press.

Blair, John M. 1956 Statistical Measures of Concentration in Business: Problems of Compiling

and Interpretation. Oxford University, Institute of Statistics,Bulletin 18:351-372.

Burns, Arthur R. 1936 The Decline of Competition: A Study of the Evolution of AmericanIndustry. New York and London: McGraw-Hill.

Einhorn, Henry A. 1964 Enterprise Monopoly and the Concentration of Domestic IndustrialOutput: 1939-1958. Ph.D. dissertation, Columbia Univ.

Evely, Richard W.; and little, I. M. D. 1960 Concentration in BritishIndustry: An Empirical

Study of the Structure ofIndustrial Production, 1935-1951. National Institute of Economic andSocial Research, Economic and Social Studies, No. 16. Cambridge Univ. Press.

Gort, Michael 1962Diversification andIntegration in American Industry. National Bureau ofEconomic Research, General Series, No. 77. Princeton Univ. Press.

Hart,P. E.; and prais, S. J. 1956 The Analysis of Business Concentration: A Statistical Approach.

Journal of the Royal Statistical Society Series A 119:150-191.

Hymer, Stephen; and pashigian, peter 1962 Firm Size and Rate of Growth.Journal of PoliticalEconomy 70:556-569.

Leak, H.; and Maizels, A. 1945 The Structure of British Industry.Journal of the Royal Statistical

Society Series A 108:142-207.

Lewis, W. Arthur 1945Monopoly in British Industry. London: Fabian.

Mansfield, Edwin 1962 Entry, Gibrats Law, Innovation, and the Growth of Firms.American

Economic Review 52:1023-1051.

Nelson, Ralph L. 1963 Concentration in the ManufacturingIndustries of the UnitedStates:AMidcentury Report. Economic Census Studies, No. 2. New Haven: Yale Univ. Press.

nutter, G. Warren 1951 The Extent of Enterprise Monopoly in the United States, 1899-1939: AQuantitative Study of Some Aspects of Monopoly. Univ. of Chicago Press.

Quandt, Richard E. 1966 On the Size Distribution of Firms.American Economic Review

56:416432.

Rosenbluth, Gideon 1957 Concentration in Canadian ManufacturingIndustries. NationalBureau of Economic Research, General Series, No. 61. Princeton Univ. Press.


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Rotwein, Eugene 1964 Economic Concentration and Monopoly in Japan.Journal of PoliticalEconomy 72: 262-277.

Shepherd, W. Geoffrey 1961 A Comparison of Industrial Concentration in the United States and

Britain. Review of Economics and Statistics 43:7075.

Shepherd, W. Geoffrey 1964 Trends of Concentration in American Manufacturing Industries:1947-1958. Review of Economics and Statistics 46:200-212.

Simon, Herbert A.; and bonini, charles P. 1958 The Size Distribution of Business Firms.American Economic Review 48:607-617.

Thorp, Willard L.; and crowder, walter F. 1941 The Structure ofIndustry. U.S. Temporary

National Economic Committee, Investigation of Concentration of Economic Power, MonographNo. 27. Washington: Government Printing Office.

Universities-National Bureau Committee for Economic Research 1955Business Concentrationand Price Policy. National Bureau of Economic Research, Special Conference Series, No. 5.Princeton Univ. Press.

Wilcox, Clair 1940 Competition and Monopoly in American Industry. U.S. Temporary NationalEconomic Committee, Investigation of Concentration of Economic Power, Monograph No. 21.

Washington: Government Printing Office.

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Industrial Concentration