Is the US economy getting more concentrated or less? At the aggregate level, more. This is a widely noted fact, leading quickly to calls for more active government moves to break up big companies.
But at the local level, no. Diverging Trends in National and Local Concentration by Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter documents the trend.
The average concentration of national markets has gone up. But the concentration of smaller and smaller markets has gone down. More businesses are dividing up county and zip code markets.
What's going on? The natural implication is that the town once had 3 local restaurants, two local banks, and 3 stores. Now it has a McDonalds, a Burger King, a Denny's and an Applebees; a branch of Chase, B of A, and Wells Fargo, and a Walmart, Target, Best Buy, and Costco. National brands replace local stores, increasing the number of local stores.
However, that turns out not to be so obvious.
What's going on? Well, they look at what happens when Wal-Mart comes to town.
The lower line is the effect on concentration in the years before and after the top national firm enters a market. Concentration drops. If, when Wal-Mart came to town, all the exiting firms went under, concentration would rise. The upper line shows you concentration ignoring the largest enterprise. It's unchanged. Either the mom and pop stores do, in fact, stay in business; or new smaller firms enter along with Wal-Mart. The phenomenon is not just the replacement of all smaller businesses by a larger number of national chains.
The paper was presented at the San Francisco Fed "Macroeconomics and Monetary Policy" conference, where I am today. The discussions, by Huiyu Li and François Gourio, were excellent. As with all micro data there is a lot to quibble with. Is a zip code really a market? Much of the data are industry+zip codes with a single firm, both before and (slightly less often) after. Maybe Walmart and other stores drag in customers from other places? And of course, concentration is not the same thing as competition. The SF Fed will, in a week or so, post the conference, papers, and discussions.
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