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Research Briefs


February 20, 2019 | Number 151

Diverging Trends in National and

Local Concentration
By Esteban Rossi-Hansberg, Princeton University; Pierre-Daniel Sarte, Federal

Reserve Bank of Richmond; and Nicholas Trachter, Federal Reserve Bank of Richmond

ost product markets are local. This is decades and the role that large national firms have played in
because the transportation of goods driving this trend. The evidence for the rise in concentra-
and people is costly, so firms set up pro- tion is uncontroversial; the share of the largest firms and the
duction plants, distribution centers, Herfindahl-Hirschman Index, among other measures of
and stores close to customers. A coffee concentration, have increased consistently in most sectors
shop or restaurant in Manhattan does not compete with since 1990. A narrative has emerged whereby this increase
similar establishments in Seattle, and probably not even in in national concentration is perceived as the cause of lower
Brooklyn. The wedge in prices or costs created by the in- product-market competition. This fall in competition is then
convenience of buying a product far away from the desired viewed as the culprit of other apparent trends, such as rising
consumption point shields companies in different locations markups and market power, the increasing profits of large
from direct competition. Of course, the size of these costs, firms, declining labor market dynamism and firm entry, and a
and therefore the geographic extent of the market, varies declining labor share. All these trends—and particularly those
by product. Markets are also product-specific. Producers related to concentration, markups, and profits—point to the
of a particular product are shielded from competition by notion that market power has been increasing. While the em-
producers of distinct but related goods and services to the pirical robustness and validity of some of these trends have
degree that their consumption requires households to move been contested in recent work, the rise in national market con-
away from their ideal variety. centration remains their main empirical foundation.
Much has been written recently about the increase in We document four main facts regarding national and local
national market concentration observed over the last two product-market concentration in the U.S. economy between

Editor, Jeffrey Miron, Harvard University and Cato Institute


1990 and 2014. We make use of the National Establishment top firms have also been responsible for increases in both
Time Series (NETS) dataset, which covers the universe of forms of concentration.
U.S. firms and their plants. The dataset includes sales and Our fourth fact establishes that, among industries with
employ­ment numbers for plants at different levels of geo- falling local concentration, the opening of a plant by a top
graphical and industrial disaggregation. firm is associated with a decline in local concentration at the
Our first fact is that the observed positive trend in market time of the opening and that this lower level of concentra-
concentration at the national level has been accompanied by tion persists for at least the next seven years. This observa-
a corresponding negative trend in average local market con- tion provides further evidence that, in those industries, large
centration. We observe an increase in concentration at the enterprises do not enter and dominate the local market but
national level across the vast majority of sectors and indus- instead lower its concentration, either by competing with
tries but a fall in concentration when it is measured at the the previous local monopolist or simply by adding one more
core-based statistical area, county, or ZIP code levels. The establishment that grabs a proportional market share from
narrower the geographic definition, the faster the decline in other local establishments. In any case, the notion that entry
local concentration. This is meaningful because the relevant by large firms eliminates local producers to the point of in-
definition of concentration from which to infer changes in creasing concentration is certainly not supported in the vast
competition is, in most sectors, local and not national. majority of industries where most U.S. employment resides.
The second fact shows that local concentration is fall- Consider the much-publicized case of Walmart. Most of
ing across a range of industries that together account for Walmart’s establishments are in the discount department
77 percent of employment and 70 percent of sales. Further- store industry, an industry with increasing national concen-
more, in industries where national concentration is rising, tration and declining local concentration. Consistent with
industries where local concentration has declined account fact four, when Walmart opens a store, concentration falls in
for the majority of employment overall (70 percent of em- the associated ZIP code. In contrast, when computing the
ployment and 65 percent of sales) across all major sectors. concentration without considering the opening Walmart es-
The presence of these diverging trends is always large, but it tablishment, concentration remains constant. One can also
is more pronounced in services; retail trade; and finance, in- consider the effect of Walmart on the number of firms in a
surance, and real estate relative to wholesale trade and manu- local market. When Walmart enters, the total number of es-
facturing. This ordering is natural given that transport costs tablishments in the ZIP code increases, though by less than
are less relevant in the latter two sectors. Together, these first one-to-one (about 3/4). In other words, Walmart generates
two facts underscore an unmistakable decline in local con- some exit, but the net result of opening a Walmart store is
centration that is pervasive across all sectors. a greater number of competitors in the market for at least
How does one reconcile a positive trend in national con- seven years after entry. This case is paradigmatic, but there
centration with a negative trend in local concentration? Our are many others across all major sectors. For example, the
third fact shows that, among the industries that exhibit expansion of Cemex, the top firm by sales in 2014 in the
this pattern, top firms have accelerated these trends. That ready-mixed concrete industry, led to a similar decline in lo-
is, excluding the top firm in each industry (in terms of na- cal concentration and an expansion in the local number of
tional sales in their industry in 2014), the national increase establishments in the industry.
in concentration naturally becomes less pronounced. Per- Our findings challenge the view that product-market
haps more surprisingly, the decline in local concentration concentration is increasing in the United States. They do so
also becomes less pronounced. Put another way, while large not by challenging the evidence that national concentration
firms have materially contributed to the observed increase has increased—we actually provide additional evidence for
in national concentration, they have also contributed to the that effect across many industries—but by observing that
observed decline in local concentration. Among industries this national trend does not imply a positive local trend
with diverging trends, large firms have become bigger, but in concentration. In fact, we show that it implies the op-
the associated geographic expansion of these firms, through posite in most industries: a declining trend in concentra-
the opening of more plants in new local markets, has lowered tion. Ultimately, concentration matters because it can lead
local concentration, which suggests increased local competi- to less competition. Hence measures of concentration
tion. In the considerably smaller set of industries where we must be aligned with product markets, as well as their geo-
observe increases in both national and local concentration, graphic and industrial scope. In particular, for the majority

of industries, concentration is likely more relevant to firm concentration, and therefore most likely increasing product
pricing and other strategic behavior at the local level. Our market competition. Carl Shapiro, a former deputy assistant
findings are also consistent with the mixed evidence found attorney general at the Antitrust Division of the Department
in recent literature regarding secular changes in markups of Justice and member of the Council of Economic Advisers
across individual industries. If local competition matters, under Barack Obama, makes a similar argument. Discussing
we should not see increases in markups or profits in the evidence of the positive trend in national market concentra-
markets where local competition is increasing. The mea- tion, he observes: “So, while these data do reflect the fact
surement of markups in local markets associated with par- that large, national firms have captured an increasing share of
ticular industries depends on important assumptions and overall revenue during the past 20 years in many of these 893
requires very detailed data. The NETS data does not allow ‘industries,’ they do not, in and of themselves, indicate that
us to calculate these local statistics, but there exists evi- the relevant local markets have become more concentrated.”
dence of flat markups over time in specific industries with We provide empirical evidence supporting the notion that, in
declining concentration and in the aggregate. the face of rising national concentration, local markets have
The facts we document are directly relevant to the design indeed become, on average, significantly less concentrated.
of antitrust policy and other policies that can prevent suc-
cessful firms from growing at the national level. We docu-
ment heterogenous trends across industries, and in some NOTE:
industries, concentration is clearly rising both at the na- This research brief is based on Esteban Rossi-Hansberg, Pierre-
tional and local level. However, our results should provide Daniel Sarte, and Nicholas Trachter, “Diverging Trends in Na-
pause for policymakers who worry about increases in mar- tional and Local Concentration,” NBER Working Paper no.
ket power. In most industries, large firms are lowering local 25066, September 2018,

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