Setting The Record Straight: Open Markets Data Set Misleads To Score Political Points
Earlier this week, the Open Markets Institute (OMI) released a data set illustrating concentration by industry, and David Leonhardt highlighted it in the New York Times‘ opinion section. While the data itself isn’t anything new – concentration in some sectors has been rising for decades and is not always inherently anti-competitive – the way Open Markets presents the data is misleading.
To maximize the appearance of concentration, the data set defines its various markets incredibly narrowly. Is the market for peanut butter, for example, all that different than the markets for jelly or mayonnaise? Or are they all, along with Nutella, mustard, ketchup, and others, part of a larger (and far less concentrated) market for condiments? As Erick Schonfeld has noted, “If you define a market narrowly enough, it is easy to make any company look like a monopoly.”
Even though some industries have become more concentrated over the past half-century, that does not mean they are any less competitive.
Former DOJ antitrust economist Carl Shapiro says much of what’s been said about changes in concentration does not have a sound basis when looking more closely at the data. “We’re not really interested in concentration for his own sake. We use market concentration as a proxy or a signal about whether a market is competitive. I spend a lot of time in the paper looking at the data and asking whether U.S. markets have in fact become significantly more concentrated over the past 20 or 30 years. There are some significant measurement issues. Much of what’s been said about changes in concentration does not have a sound basis when one looks more closely at the data. I see some increase in concentration, but not to levels that indicate the presence of many monopolies or even tight-knit oligopolies.” (Walter Frick, “As More People Worry About Monopolies, An Economist Explains What Antitrust Can And Can’t Do,” Harvard Business School, 11/01/17)
Critics propping up concentration as cause for transformation of antitrust law “are wrong about their core premise,” says Senator Mike Lee (R-Utah). “These critics are wrong about their core premise. It’s extremely difficult to measure market concentration across the entire economy, and in any event, fair minded economists have explained that the purported increase in concentration should not be enough alone, in and of itself, to be of overwhelming concern to us. Nevertheless, critics of the current regime call for a fundamental transformation of antitrust law and competition policy. In particular, they want competition policy to incorporate subjective and political goals into the analysis. I have strong concerns that that approach could result in antitrust enforcement that is unmoored from objective economic analysis and could invite the kind of corporate and political influence that modern antitrust policy has long sought to avoid.” (Sen. Mike Lee, Hearing: “Oversight Of The Enforcement Of The Antitrust Laws,” Senate Judiciary Committee Subcommittee On Antitrust, Competition Policy And Consumer Rights, 10/3/18)
Even as some markets become more concentrated at the national level, concentration is falling at the local level where consumers often actually buy their products.
A new paper from Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter found concentration is declining on the local level. “In contrast to the increasing national trend, local concentration has decreased, on average, for all major sectors and for the large majority of narrowly defined industries (industries accounting for roughly 70% of US employment and sales). The findings hold for a variety of geographic definitions (CBSA, county, or ZIP code) and industrial aggregations (from 2 to 8 digits).” (Esteban Rossi-Hansberg, Pierre-Daniel Sarte, And Nicholas Trachter, “Top Firms And The Decline In Local Product-Market Concentration,” VoxEU, 10/19/18)
Levels of local concentration often have a far greater impact on consumer behavior than national concentration. “In most industries markets are not national, they are local. The opening of a coffee shop in San Francisco does little to reduce the price of my morning cup in Chicago. The local retailer in Richmond does not compete with retailers in Washington, let alone in Dallas. The presence of transport costs and the imperfect substitutability between goods imply that markets are (at least to some extent) local and specific to particular products. Hence, if we hope to get clues about the evolution of competition over time, in most industries we need to measure product-market concentration locally, instead of nationally as is typically done.” (Esteban Rossi-Hansberg, Pierre-Daniel Sarte, And Nicholas Trachter, “Top Firms And The Decline In Local Product-Market Concentration,” VoxEU, 10/19/18)
Several unique characteristics of the tech sector ensure that it remains incredibly competitive.
Compared to previous physical networks, today’s platforms are more susceptible to attacks from new entrants thanks to lower barriers to entry, zero switching costs, and multi-homing, argues economist David Evans. “Third, online platforms are more susceptible to attack by entrants than network industries of a century ago. Network effects and sunk costs made the natural monopolies around the turn of 20th century difficult to challenge. Rivals had to sink massive amounts of capital into duplicating physical networks such as railroad tracks and telephone lines. Using multiple networks, or switching between them, was expensive for customers, even if a second network was available. However, online platforms can leverage the Internet to provide wired and wireless connections globally. People find it generally easy, and often costless, to use multiple online platforms, and many often do. The ease and prevalence of multihoming have enabled new firms, as well as cross-platform entrants, to attract significant numbers of users and secure critical mass necessary for growth. Incumbent platforms then face serious competitive pressure from new entrants—startups or other online platforms—because their network effects are reversible.” (David Evans, “Why The Dynamics Of Competition For Online Platforms Leads To Sleepless Nights, But Not Sleepy Monopolies,” SSRN, 7/23/17)
University of Florida Professor D. Daniel Sokol and Central University of Finance and Economics’ Jingyuan Ma argue antitrust regulators need to take into account several factors, like low switching costs, before determining market share in the tech sector. “The case for antitrust intervention in online markets requires great caution because of a number of factors: proper market definition, accounting for possible low entry barriers, multi-homing and low switching costs, and the need for a proper analysis of all sides of a market.” (Daniel D. Sokol And Jingyuan Ma, “Understanding Online Markets And Antitrust Analysis,” Northwestern Journal Of Technology And Intellectual Property, 10/12/17)