Oligopoly! Highly Concentrated Markets Across the U.S. Economy

by Amy Taub and Robert Weissman

With the embers still glowing frrom the slash-and-burn merger mania of the 1980s, this decade has witnessed a merger rush of far greater magnitude.

U.S. corporate combinations proceeded at a record pace in 1998, smashing the pinnacle established the vcar before. The U.S. Federal Trade Commission (FTC) reports more than 4,700 major Mergers occurred in 1998 (the FTC's reporting year end's in September), with the transactions combined totaling more than a trillion dollars. The 1997 record was 3,400 mergers worth S700 billion.

The result is an increasingly concentrated national economy, with fewer and fewer corporations exerting more and more market - and political dominance.

Measuring Market Concentration

In evaluating whether to permit or challenge mergers, the U.S. Department of Justice and the FTC use a device called the Herfindahl-Hirschman Index (HHI) of market concentration. The HHI is calculated by summing the squares of the market shares of all the participants in a given market.

The antitrust authorities use the HHI index, rather than the old system of adding the market shares of the top four firms in a market, because it gives proportionally greater weight to the market shares of larger firms.

In assessing a market, the antitrust authorities perform an HHI calculation, and then classify the market as unconcentrated, moderately concentrated or highly concentrated.

Markets with an HHI below 1000 are considered unconcentrated; those with HHIs between 1000 and 1800 arc characterized as moderately concentrated; and those above 1800 arc regarded as highly concentrated.

Despite the precision of these numbers, performing an industry concentration analysis is more art than science, because there are inevitable disputes about determining the boundaries of a "market" These disputes concern both market definition - for example, does coffee Constitute its own market, or is it really part of a "hot drinks" category that includes tea and hot chocolate? - and geographical boundaries - for example, do supermarkets in St. Paul and Minneapolis compete, or are they part of separate markets? These caveats notwithstanding, the HHI measure does give a rough approximation of industry concentration, although the Justice Department guidelines are arguably too timid in their definition of industry concentration.

Corporate Chokehold On the Economy

Performing HHI calculations on many of the leading industries in the United States reveals extraordinary levels of concentration throughout the economy.

Airlines at first appear modestly concentrated with an HHI of at least 1460. But taking into account the alliances and sharing agreements that have effectively integrated or stand to integrate American and US Airways, United and Delta and Northwest and Continental, the industry is highly concentrated with an HHI over 2600. (The northwest-Continental alliance, however, faces serious problems, with the Justice Department moving to block the merger in October.)

The cars and trucks industry is highly concentrated, though Japanese manufacturers have broken the stranglehold the Big Three long maintained. Toyota's market share is approximately 10 percent and Nissan sells 4 percent of cars sold in the United States.

The sin industries of tobacco and beer are both highly concentrated. The growth of microbreweries notwithstanding, the beer HHI is more than 2750. With Philip Morris dominating the marketing of smokes, tobacco's HHI is more than 3200.

The junk food product markets are similarly oligopolistic. The HHI for the salty snack market is just under 3000, while the soft drink market is more than 3100.

The retail markets of petroleum and supermarkets appear unconcentrated, while drugstore appear moderately concentrated but here the national market shares are misleading. Consumers make retail purchases in local markets, and so local market HHIs are generally more relevant for retailers.

And local supermarkets, gas stations and drugstores are typically highly concentrated, with national acquisition sprees increasingly giving chains substantial national market shares. Indeed, that the drugstore sector - not long ago the quintessential "mom-and-pop" area - already is moderately concentrated on a national level is remarkable evidence of surging corporate takeovers and combinations.

Amy Taub is a Multinational Monitor Intern. Taub gathreed the data for this article; Robert Weissman provided the text.