In 2011, I asked the following question on a problem set:
About 140 years ago, most—maybe all—major U.S. cities had a number of beer companies that produced and sold beer just for the particular city they were in plus about a 30-mile radius.There were well over 100 beer companies, no one company sold more than about 4% of the total amount of beer sold nationally, and the top 8 companies sold less than 25% of the total amount of beer sold.
Then two things happened over the next few decades.
(1) Major U.S. cities began to be connected by railroads.
(2) Beer companies merged and consolidated: the number of beer companies fell by half.
Question: With fewer beer companies, did the beer market become less competitive than it had been before the railroads? Why or why not?
What I wanted the students to see, and many did see, is that with a decline in shipping costs, there would likely be more companies selling in a given market and so the increase in concentration nationally was irrelevant. If the consumer has more choices, then, all other things equal, the market is more competitive.
I thought of that when I came across C. Lanier Benkard, Ali Yurukoglu, and Anthony Lee Zhang, “Concentration in Product Markets,” NBER Working Paper 28745, April 2021. Here’s the abstract:
This paper uses new data to reexamine trends in concentration in U.S. markets from 1994 to 2019. The paper’s main contribution is to construct concentration measures that reflect narrowly defined consumption-based product markets, as would be defined in an antitrust setting, while accounting for cross-brand ownership, and to do so over a broad range of consumer goods and services. Our findings differ substantially from well established results using production data. We find that 42.2% of the industries in our sample are “highly concentrated” as defined by the U.S. Horizontal Merger Guidelines, which is much higher than previous results. Also in contrast with the previous literature, we find that product market concentration has been decreasing since 1994. This finding holds at the national level and also when product markets are defined locally in 29 state groups. We find increasing concentration once markets are aggregated to a broader sector level. We argue that these two diverging trends are best explained by a simple theoretical model based on Melitz and Ottaviano (2008), in which the costs of a firm supplying adjacent geographic or product markets falls over time, and efficient firms enter each others’ home product markets.
Benkard and Yurukoglu are at Stanford University’s Graduation School of Business and Zhang is at the University of Chicago’s School of Business.
Are anti-trusters in the Biden administration familiar with this important finding? Specifically, I wonder if Lina Khan, chair of the Federal Trade Commission knows this and sees its importance for the discussion of competition.
READER COMMENTS
robc
Dec 17 2021 at 3:27pm
Your question leaves out another key issue: refrigeration. I think it was a bigger deal than trains, but both mattered.
Also, funny related issue — at one point in time (1960s, I think), the best selling beer in Louisville, KY was made in Evansville, IN and the best selling beer in Evansville, IN was made in Louisville, KY.
I don’t know what that says about anything.
Matthias
Dec 19 2021 at 11:46pm
Most beer sold these days is pasteurised. So you don’t need a cold chain.
robc
Dec 20 2021 at 7:39am
That is true if measured by volume. Measured by brand? Not even close to true.
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Bill Conerly
Dec 17 2021 at 4:27pm
Same is true of banks. Fewer banks in total, but the average customer has more choices.
One cause is similar: technology increased economies of scale. Another big factor in past decade has been higher regulatory costs. In an effort to slap down the big banks, additional regulatory burden further increased economies of scale, encouraging smaller banks to sell out to bigger banks.
Matthias
Dec 19 2021 at 11:47pm
Branch banking used to be basically banned in the US.
Other parts of the world, eg like Canada to the north, had large national banking chains for much longer time. And, of course, much fewer financial crises.
See George Selgin’s work for more details.
rsm
Dec 19 2021 at 1:02am
Was the beer better 140 years ago? Have companies watered down beer and effectively colluded to fix prices? Do you have more choices at a higher price and lower quality?
《 all other things equal》
When is this ever true outside of economics la-la land?
Jon Murphy
Dec 19 2021 at 11:38am
The ceteris paribus assumption is a common assumption in all the sciences, not just economics. Any “if X, then Y” statement will be a ceteris paribus statement.
But, of course, ceteris is not paribus. Any scientist knows that. It’s a simplifying assumption. But the mere fact that ceteris is not paribus is not grounds for epistemic nihilism.
rsm
Dec 20 2021 at 2:06am
《epistemic nihilism》
Are you willing to entertain the possibility that you have constructed a strawman?
What if prices really are arbitrary, but we can insure against unwanted inflation with full indexation? Is it epistemically nihilistic to believe individuals can use basic income insurance (inflation-protected) to take the time to brew their own beer, because the corporate offerings are not as good?
Where is the deadweight loss in transactions if the real purchasing power of both sides is kept stable (through indexation) no matter what nominal prices do?
Jon Murphy
Dec 20 2021 at 8:26am
It’s entirely possible I misunderstood your comment there. So, rephrase your comment. Why bring up the ceteris paribus objection?
rsm
Dec 21 2021 at 11:04pm
《If the consumer has more choices, then, all other things equal, the market is more competitive.》
In this beer example, how can you possibly control for quality, price, variety, etc.?
Wasn’t beer much more nutritious, like bread once?
If you want that kind of beer, why has the market taken it away? Why was it once affordable, but today you have to buy equipment to brew your own if you want real choice?
Why do I get the feeling every time I shop that companies really dictate my choices by removing items, shelf placement, advertising, etc.?
Matthias
Dec 19 2021 at 11:50pm
Be careful not to confuse your own preferences with what other people like.
While I may like some nice craft beer like a Lambik or Russian Imperial Stout, many people actually prefer light lagers. Especially once you factor in the lower price point (both thanks to lower production costs and thanks to lower alcohol tax when your beer is weaker).
rsm
Dec 20 2021 at 12:50am
Can I just say, I don’t even drink beer?
robc
Dec 20 2021 at 9:28am
Concentration in the beer industry, 1950-1980:
https://www.beerhistory.com/library/holdings/shakeout.shtml
That ends just after the beer wars began, roughly 1975-1995. It would end with there being 3 major national breweries, clearing space for the craft beer explosion.
Those 3 are now 2, with the US merger of Miller and Coors. Or zero, since all 3 are foreign owned now.
Knut P. Heen
Dec 22 2021 at 6:25am
Budweiser and Coors competes with water.
Competition is often defined too narrowly (in the self-interest of the competition authorities). Businesses produces utility. They are all in competition with each other. Another beer or a dessert is often a choice. Wine, beer, or water is often a choice. Going on vacation or installing a new fire place is a choice. Competition is a consequence of a limited consumer budget. Once you get rich, you start complaining about the competition problem in the market for private jets because you have nothing else useful to spend the money on.
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