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 organization 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)
To understand the specific measure being used here, you need to know that the Economic Census classifies firms according to what is called the NAICS, which stands for North American Industry Classification System. The NAICS starts off by classifying industries into big categories, which are then subdivided into smaller group, and then subdivided again, and again, and again. The biggest categories are called “two-digit”–for example, manufacturing categories all start with a 31, 32, or 33. The three-digit category 335 is “Electrical Equipment, Appliance, and Component Manufacturing.” The four-digit category 3352 is “Household Appliance Manufacturing.” And continuing down the chain, 33510 is “Small Appliance Manufacturing” while 33520 is “Major Household Appliance Manufacturing.”
Obviously, when looking at the extent of competition in an industry, it makes sense to look at the greatest possible level of detail. Not all two-digit manufacturing firms will compete against each other. But “Small Appliance Manufacturing” firms are likely to have similar product line–or the ability to shift easily into similar product lines when it seems profitable to do so. The NAICS divides the US economy into 850 six-digit categories. Thus, a logical question when asking about industry concentration is to look at the extent of concentration and shifts in concentration across these 850 categories.
Here’s the overall breakdown from the ITIF report on level of concentration in 2017 as measured by the four-firm ratio:
One can then compare this level of concentration with the level found in the 2002 Economic Census. Here’s are some results of such a comparison from the ITIF report:
I am of course aware that the message of this report runs counter to a wave of claims that there has been a large wave of increased concentration of industry in the United States. But as I have pointed out in the past, these claims about a a meaningful overall increase in industry concentration have been open to question. When you look more closely, it often turns out that the increase in concentration is that the share of the biggest four firms as measured at the six-digit NAICS level rose from, say, 20% to 25%, which is not likely to bring about a meaningful decrease in the extent of competition.
Pointing out specific concerns about lack of competition in certain industries or the growth of certain firms–say, antitrust issues raised by some of the big tech companies–does not prove that there has been an overall decrease in competition for the economy as a whole. The overall lesson here, perhaps, is to focus attention on specific companies and industries that raise concerns about lack of competition, but to be quite cautious about overall claims that competition has increased more broadly in all sectors.
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.