Is Concentration Increasing?
The evidence on whether industrial concentration is increasing is mixed. Most economists cite figures like those in Table 1 to argue that, on average, domestic concentration ratios for most industries changed little between 1967 and 1987. Relative stability of our industrial structure is supported by data for concentration ratios. Note that although the number of firms in many industries has increased, many giant firms have apparently retained their market shares.
Critics often argue that market power within particular industries is less important than the increasing concentration of economic power accomplished primarily through mergers. Conglomerate mergers have allowed the largest American firms to steadily acquire a growing share of all U.S. manufacturing assets over the past half century. Figure 4 indicates that the top 200 firms (0.1 percent of all U.S. manufacturing corporations) control three quarters of all manufacturing assets, and this percentage has crept up slowly over the last half century as manufacturing has declined in importance in our economy.
Major debates also surround the issue of whether bigness and badness are synonymous in the case of a conglomerate. Virtually all giant firms operate in several industries, and nearly all operate across national boundaries. Thus, although concentration within specific industries may be relatively stable, giant multinationals are increasingly important players on the international scene. In addition to their huge shares of manufacturing assets (capital), these giants also account for growing proportions of employment, sales, and profits.
Giant conglomerates may not have as much market power as big firms that operate in only one industry, but they do have substantial economic clout and may exercise their power in the political arena. Multinational firms are of special concern because of their interests in international politics, but even giants are not immune to market forces.
Regulatory barriers to entry or restrictions on imports facilitate concentration, but significant economies of scale can make concentration unavoidable in some industries. High capital costs erect substantial entry barriers if profits are uncertain. Where economies of scale are substantial, high fixed costs combined with low marginal costs cause average costs to fall across a wide range of output. In the short run, average variable costs may reach their minimum (the shutdown point) at extremely low prices and high output levels. These economies of scale incite cutthroat competition during periods of slack demand. A price war often shrinks the number of firms in an industry when losers go bankrupt. Price wars also generate pressures for collusive price-fixing agreements, or for cries from the industry for government "bailouts" and protective regulations and controls.
Some defenders of modern corporate giantism argue that size is a tribute to the success of entrepreneurs and managers in serving consumers' needs in exceptionally efficient ways. Large corporations may also be a consequence of capital-intensive and highly complex modern technology. Other defenders contend that large enterprises are necessary to comply with the maze of federal, state, and local regulations governing modern business practice. Small firms have difficulty acquiring the capital needed to sustain these endeavors.