This presentation by Joshua WRIGHT, Professor, George Mason University and Executive Director of the Global Antitrust Institute, was made during the discussion “Market Concentration” held at the 129th meeting of the OECD Competition Committee on 7 June 2018. More papers and presentations on the topic can be found out at oe.cd/2gw.

1. 1
Towards a Better Understanding of Concentration:
Measuring Merger Policy Effectiveness
Organisation for Economic Co-operation and
Development
Discussion on Market Concentration
June 7, 2018
Joshua D. Wright
University Professor
Scalia Law School at George Mason University
Executive Director, Global Antitrust Institute

2. Concentration and Competition Policy:
Separating Claims
• Stylized facts (?): Increasing corporate concentration in
the United States and around the world
• Economic claim: Renewed assertions that concentration
and economic performance are inversely related
– Increasing concentration causes an increase in market power, which
in turn, results in
– Higher prices, corporate profits, and economic inequality
– Lower output, innovation, and consumer welfare
• Policy claim: Lax antitrust enforcement is the cause of
this increase in concentration
– And in particular, lax merger policy and competition policy touching
platforms and high-tech industries
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3. The Evidence: Is Concentration Increasing?
• Studies finding increasing
concentration in the
United States have used
very crude aggregation
techniques:
– Furman & Orszag
(2015): CR50 (revenue)
measured at the 2-digit
industry level
– The Economist (2016):
CR4 measured using
4-digit NAICS
categorization
– Autor et al (2017): CR4
& HHI using 4-digit SIC
classifications
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Source: Furman & Orszag (2015)

4. The Evidence: Is Concentration Increasing?
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Source: The Economist (March 2016)

5. The Evidence: Increasing Market Power?
• Increased markups &
profits
– De Loecker & Eeckhout
(2017) estimate average
markups around 20%
above MC in 1950-80; 67%
in 2014
– The Economist (2016)
estimates that half of firms
with exceptional profits
(above 10%) are found in
the technology sector
– Furman & Orszag (2015)
estimate that ROI at best
performing firms is 10x the
median, was 3x in the 90s
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Source: De Loecker & Eeckhout (2017)

6. The Evidence: Lax Antitrust is the Cause?
• 1996-2003, 52.9% of
investigations in
markets with HHIs of
<1800 resulted in
enforcement actions
• 2004-2011, 2.8% of
investigations in
markets with HHIs of
<1800 resulted in
enforcement actions
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Source: Kwoka (2015)

7. The Evidence: Type II Error in Merger Enforcement Policy?
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Mean Price Changes, 1970s-2000s
Source: Kwoka (2013)

8. Evaluating the Empirical Claims
• What do we know about whether and to what
extent concentration is increasing?
• Do changes in aggregate concentration measures
imply – even under the posited theories –
meaningful changes in competition and welfare?
– Measurement
– Inference
– Identification
• Is lax antitrust enforcement a cause of increasing
concentration?
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9. Revisiting The Evidence:
Is Aggregate Concentration Increasing?
• CR50 > 30% in more
industries than in 1997
– Average market share for
firm is .6%
• 2- and 4-digit SIC/NAICS
level industry
classifications are far too
broad to meaningfully
capture competition
• Does the modest
increase in aggregate
concentration show a
reduction in
competition?
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Source: Furman & Orszag (2015)

10. The Critique: Measurement
• Aggregation obscures
market-level
information (e.g.,
Froeb & Werden,
2018)
– Broad measures (e.g.,
CR50) are not useful
because they do not
measure competitive
dynamics between firms
– Product and geographic
markets are often local
or small
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Source: Froeb & Werden (2018)

11. The Critique: Inference
• Higher markups are consistent
with several explanations other
than a rise in market power
– Change in composition to
lower MC products and
services; more
differentiation
• Ganapati (2018) finds that
industry concentration is
positively correlated with
productivity and real output,
uncorrelated with price changes
• Shapiro (2017) finds no change
in manufacturing profits (as %
of GDP) over the last 20 years
• Hall (2018) finds no evidence
that superstar firm intensive
sectors have higher markups
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Source: Ganapati (2018)

12. The Critique: Endogeneity
• Price/profit-concentration studies plagued with
endogeneity and lack of identification
– IO economists have long been skeptical of claims of
causal inference arising from cross-sectional studies
(e.g., Demsetz, 1973)
• Use of aggregate price-concentration studies are
not adequate to make reliable inferences about
intensity of competition or the desirability of
changes in merger policy
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13. The Critique: Lax Merger Enforcement
• Vita & Osinski (2016)
challenge Kwoka’s
methodology and conclusions
– 2/3 of sample covers 3
industries (petro, airlines, and
journal publishing)
– Percentage of cases with
enforcement actions has
increased every year since 2004
– Only 7 mergers analyzed since
2000, of which only 1 is a
potential Type II error
– Estimates of price effects were
not weighted by their variances
– No reporting of standard errors
for estimated average price
effects
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Source: Vita & Osinski (2016)

14. 14
• Concentration may be increasing modestly in some
highly aggregate sense, but that masks more
policy-relevant market level information
– Competition and concentration are different things and
need to be measured differently
• Even aggregate trends seem to suggest markups
and output are both increasing – hard to reconcile
with a rise in monopoly power
• No clear evidence that merger policy is too lax or
too stringent
Summary of the Evidence

15. Competition Policy & Concentration:
Where Do We Go From Here?
• Should merger policy be tightened or
relaxed? Neither?
– We still know little about the effectiveness of
horizontal merger policy
– Ex-post evaluations of individual cases are of
limited use because they do not evaluate
merger policy
• The bad news: We are not very close to a
policy-relevant answer to those questions
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16. Competition Policy & Concentration:
A Modest Proposal
• The good news: economic tools can help us
better inform this policy discussion
• What sort of evidence do we need to
evaluate current merger policy?
– Better identification
– Better measurement
– Better inference
• Much support for merger retrospectives, but
economists must play an important role in
research design to ensure studies generate
inferences that help at the policy level
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17. Limits of Merger Retrospectives in Policy Setting
• Determining whether the government was correct
in a particular case tells us little about the optimality
of merger policy
– Random errors do not identify policy bias
• Merger retrospectives capable of evaluating policy
require: (1) market data pre- and post-merger and
2) enforcement agency’s predictions of the merger
– Antitrust community has largely focused on (1)
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Sources: Carlton (2009); Werden (2015)

18. Improving Merger Retrospectives
• The threshold policy question should be whether
the FTC / DOJ merger policy generates
systematic error
• The analytical focus should be on evaluating the
accuracy of the process by which enforcers make
decisions, not merely outcomes
– Compare the observed outcomes with the details of
the agency’s assessment
– Requires FTC / DOJ to record their choice of tools and
model predictions throughout the assessment
– Agencies are best suited to conduct these studies
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19. Improving Merger Retrospectives
• The FTC and DOJ play a critical role in recording
their assessment techniques and predictions
– Agencies can conduct the analyses internally or share
data with external researchers
• As Carlton (2009) observes, merger analysis has
grown increasingly sophisticated, but evaluation
of policy has not
– The consequences of merger policy are too
important to be set by popular opinion
• Rigorous policy evaluation is a heavier lift, but
worth the investment
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20. Thank You!
Jwrightg@gmu.edu
GLOBAL ANTITRUST INSTITUTE
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