Industry Concentration: Is It Rising Overall?

One of the simplest ways to measure the degree of competition in an industry is the “four-firm concentration ratio.” Take the market share of the four largest firms in the industry. Add them up. You’ve done it! For example, an industry where the biggest four firms each have 10% of the market would have a four-firm concentration of 40 percent. As a very rough rule of thumb, a four-firm ratio above 80 percent is commonly considered to be “high,” while a four-firm ratio of 50 to 80 percent is medium, and a ratio below 50 percent would be considered “low.”

Of course, one can immediately raise a number of concerns with this simple measure, which is why economists often use either a slightly more complex formula called the Herfindahl-Hirschman Index, or instead just skip past these overall measures of industry concentration and instead work with more detailed models of individual markets. In addition, when talking about industry concentration, a key question is always how one defines the relevant market. For example, does the measure of industry concentration look only at US firms, or also at imports? Is the measure of industry concentration looking at market share across the entire country, or at market shares within certain regions: for example, if there are only three or four big supermarkets chains near where I live, it’s may not matter much for practical competition that there are also completely different big supermarket chains in other regions.

The economic field of industrial organizations spends a substantial chunk of its mental energy trying to think through alternative measures of concentration in a variety of contexts. Here, I want to make a simpler point. If there is a large and widespread increase in industry concentration in the US economy, it should presumably show up even in a relatively crude measure like the four-firm concentration index.

Every five years the US Census Bureau does an “economic census,” which is a census of firms in the economy. The most recent economic census was done in 2017, and the results are being released over time as they are tabulated. In December 2020, detailed data on four-firm concentration ratios by industry was released. Robert D. Atkinson and Filipe Lage de Sousa summarize the results in “No, Monopoly Has Not Grown” (Information Technology & Innovation Foundation, often known as ITIF, June 7, 2021)

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