For example, the momentum strategy generated a negative alpha over the same time period. To control for these factors, we obtain estimates of both the capital share and the cost of capital from the Bureau of Labor Statistics (BLS) to augment our analysis. and with greater force which increases the rate of the reaction. Change in the level of product market concentration and profitabilitycontrolling for the use and cost of capital This table reports coefficients from regressions of ROA, profit margins, and efficiency measures on the industry concentration index (defined as the sum of the annual rank of the HHI and the annual inverse rank of the total number of industry incumbents), controlling for the use and cost of capital and other variables. If a measure is an inverse proxy of concentration, then descending ranking is used, so that by construction, the index increases as the level of concentration increases. Age is the time (in years) from the firms CRSP listing date. If the concentration of a reaction species is increased (at constant T and V), the equilibrium system will shift in the direction that reduces the concentration of that species. This figure demonstrates that while the aggregate Lerner Index experienced a positive shift in the early 2000s, aggregate Asset Utilization has declined over time. Symbols a, b, and c indicate significance at 1%, 5%, and 10%, respectively. Intersales is equal to the total domestic sales of majority-owned foreign affiliates operating in the US industry is defined using the acquirers three-digit NAICS code. For clarification, we use the following subscripts: i for firms, j for industries, t for year (unless specified otherwise), A for acquiring firm, T for target firm, and d for merger deal. 4. decreasing the concentration of X. Expanding the list of control variables with additional proxies of industry performance in TableIX Columns 46 does not materially change the magnitude or the statistical significance of the concentration coefficients. Therefore, these findings indicate that our conclusions do not change when we perform industry- rather than firm-level analysis, and they account for the potential contribution of private firms to the overall industry profitability, as well as to overall industry concentration. In addition, relative to other industries, mergers gains in highly concentrated product markets are also higher for horizontal deals. Panel A (Panel B) depicts the distribution of percentage changes in the HHI Compustat-based index (HHI census-based index) across industries. Our paper makes three important contributions to understanding product markets in the USA. We perform a similar exercise by replacing the change in concentration with the percentage change in the number of public firms and find that the correlation coefficient is close to zero and statistically insignificant. Assets is the book value of total assets. The data were obtained from Hoberg-Phillips website (http://hobergphillips.usc.edu/industryconcen.htm). Direct link to Davin V Jones's post When you break something , Posted 6 months ago. In addition to firm-fixed effects, we also include year-fixed effects to control for unobserved time-specific shocks affecting all firms. Our results on M&A announcements are also unaffected by the inclusion of proxies for foreign competition. Change in the level of product market concentration and M&A returnscontrolling for private firms The table presents results of regressing CARs around merger announcements on proxies for the level of product market concentration that include sales by private firms. Second, our findings that product markets have become more concentrated in the last two decades, and that the firms affected by this secular trend generate higher profits and abnormal stock returns, augment a growing body of economic research marking a change in the nature of US product markets. Introduction The cells of your body are capable of making many different enzymes, and at first you might think: great, let's crank all of those enzymes up and metabolize as fast as possible! Concentration in Product Markets C. Lanier Benkardy, Ali Yurukogluz, Anthony Lee Zhang April 2021 Abstract This paper uses new data to reexamine trends in concentration in U.S. markets from 1994 to 2019. Consistent with our previous findings, the results show that the ROA and the Lerner Index are positively related to concentration levels over the period 200113. Aggregate operating income before depreciation (OIBDP) (summed across all firms), scaled by the aggregate book value of assets (also summed across all firms), for a given year. Total value of shipments (VSHIP) minus the sum of (total payroll (PAY); total cost of materials (MATCOST); and cost of electric and fuels (ENERGY)), all divided by the total value of shipments. a. Concentration of capital and production is a law of capitalism. So every reaction begins by having the reactant's bonds broken somehow. What is the rationale behind how surface area increases when the substance is broken down into smaller parts? solution of potassium iodide in our beaker here. The sample covers the period 200114. Market equity is equal to the CRSPs shares outstanding (SHROUT) times the absolute value of price (PRC) in June of year, Capital payments variable, scaled by the total value of production, both variables reported in KLEMS Multifactor Productivity Tables, available at, Sum of value of shipments of the four largest companies divided by the total value of shipments in the industry (in %). For example, we use the share of the top four firms reported in 1997 for the observations in years 1997, 1998, 1999, 2000, and 2001. Although this evidence implies that aggregate profitability and aggregate concentration levels are moving in the opposite direction, additional analysis reveals that this is not the case. Created by Yuki Jung. If you remove the energy, you favour the product forming reaction. For example, we find that the correlation between the percentage increase in Compustat-based HHI index and the percentage change in the ratio of sales by foreign multinational to US public firms is 0.20. Using various industry definitions, we document a positive correlation between changes in concentration levels and return-on-assets (ROA). First, while the increase in industry concentration levels correlates with remaining firms generating higher profit margins, we observe no link between asset utilization, a proxy for efficient use of capital, and concentration. As it turns out, though, you really don't want to produce and activate all of those enzymes at the same time, or in the same cell. This argument is consistent with the antitrust polices of the Federal Trade Commission and the Department of Justice, in which horizontal mergers in highly concentrated markets are predominantly investigated and/or blocked. up into smaller pieces, we were able to the rate of the reaction. HHI is the HerfindahlHirschman index based on sales data from Compustat. From a theoretical perspective, mergers can create value by improving efficiency, including economies of scale and scope, synergies, and elimination of duplicate functions; mergers also create value through increasing market power. Since we include firm-fixed effects, and firms rarely switch industries, the proxies for industry concentration can be interpreted as the changes in concentration relative to the industry mean. So we increase the temperature. This time, when we add We use an extended period, including information from the earliest CRSP database coverage, to calculate the number of public firms. 2) When the concentration of product (s) is increased, the system tries to reduce . A potential explanation for the increase in profitability in more concentrated industries is the decrease in contestability over time resulting from increasing barriers to entry. Out of seventy-one industries, sixty-six have experienced a negative change between 1997 and 2014. Winsorized at 1% and 99% of the annual distribution. This analysis also reveals that total factor productivity (TFP) is uncorrelated with industry concentration levels, indicating that if the efficiency channel is at work, it would be observable through factors unrelated to capital, labor, or materials. Heretofore, our analysis concerning the association between concentration and profitability has focused on Compustat-based measures of concentration. For full access to this pdf, sign in to an existing account, or purchase an annual subscription. Consistent with this explanation, Barkai (2016) uses a general equilibrium model to demonstrate that increase in markups is the only factor able to explain the increase in profit share in the US nonfinancial sector in the past 30years. These findings strengthen claims that antitrust agencies were more lenient during both the Bush and Obama administrations. Taken together, our results suggest that market power is becoming an important source of value. Publicly traded firms tend to be much larger than private firms, and are therefore typically the key industry players. To test this hypothesis, we estimate the parameters of the following model: To investigate this issue, we calculate the annual change in the concentration levels in each industry (defined using a firms three-digit NAICS code) over the period 19722014: Import competition and the great U.S. employment sag of the 2000s, Competition and innovation: an inverted U relationship, The limitations of industry concentration measures constructed with Compustat data: implications for finance research, The China syndrome: local labor market effects of imports competition in the United States, Relation of profit rate to industry concentration: American manufacturing, 19361940, Detecting abnormal operating performance: the empirical power and specification of test statistics, Contestable markets: an uprising in the theory of industry structure, Enjoying the quiet life? Although some of our profitability tests are limited to publicly traded firms, we have performed multiple tests to ensure that our findings are robust to the inclusion of private firms. Legal scholars argue that, beginning with George W. Bushs first administration, antitrust enforcement has declined (e.g., Spitzer, 2011; Harty, Shelanski, and Solomon, 2012; Crane, 2012), despite the Clinton administrations having significantly intensified the enforcement of antitrust laws in the 1990s (Litan and Shapiro, 2001). Share repurchases and firm performance: new evidence on the agency costs of free cash flow, Customer-base concentration: implications for firm performance and capital markets, Intangible capital and the investment-q relation, The evolution of competition in U.S. manufacturing, The influence of the financial revolution on the nature of firms, Intra-industry profitability differences in U.S. manufacturing 19531983, Causes of increased competition in the U.S. economy, 19391980, The Author(s) 2019. The pattern is economically large, robust to different measures of product market concentration and different industry classifications, and prevalent across the majority of US industries. The historical data on employment by firm size are obtained from Business Dynamics Statistics (BDS) annual report, managed by the US Census (http://www.census.gov/ces/dataproducts/bds/data.html). And if we were to HHI is the HerfindahlHirschman index based on sales data from Compustat. of the reactants is increased. Specifically, the median increase in HHI is 41%, while the mean increase is 90%. of hydrogen peroxide to occur very quickly. Therefore by breaking it These findings are robust to the inclusion of (i) private firms; (ii) factors accounting for foreign competition; and (iii) the use of alternative measures of concentration. As we will demonstrate, this increase in concentration is widespread across industries. For example, a large firm may enhance flexibility by reallocating its existing resources to extract the highest productivity from any unit of capital, consequently increasing firm profitability. Change in the level of product market concentration, profit margins, and efficiency. Number of Firms is the total number of public firms in an industry. Next, we perform a series of robustness tests to investigate whether our profitability and M&A findings are robust to accounting for other mechanisms and measures of market concentration. Consistent with a market-power explanation, our analysis heretofore indicates that firms operating in increasingly concentrated industries earn higher profits. This result shows that firms tend to generate significantly higher profits when their industries become more concentrated. For the most part, the reactions that produce some desired compound are only useful if the reaction occurs at a reasonable rate. -speed at which chemical reactions occur what can the collision model tells you about a reaction? While domestic production is crucial in supplying final goods to consumers in the USA, imports remain a significant component of overall product market activity. We use 1997 as our starting period because 1996 and 1997 are the years in which, during our sample period, the HHI was at its lowest level, and the number of public firms in our sample peaked.6 For every industry we use all public firms data from the merged CRSP-Compustat universe and calculate a percentage change in HHI from its 1997 level to its 2014 level. Our previous analysis used accounting profits to measure firms profitability. Figure1 panel D presents the results of calculating the share of employment in firms with 10,000 or more employees, which is the largest size-category classified by the Census Bureau.4 The trend corresponds to the sales-based analysis: Employment share by large firms in the overall economy began rising in the mid-90s and has recently exceeded previous historical peaks. In particular, we examine whether the higher ROA and market reaction to merger announcements are also associated with abnormal stock returns. So we could monitor the If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. Therefore, if the payment for capital is higher in concentrated industries, ignoring these two factors can lead to a spurious correlation between accounting profits and concentration levels. When you break something in half, the surfaces where those two pieces were connected are now new surface areas for the two objects. In this subsection, we examine whether the increased concentration has been widespread across industries, or whether the phenomenon has been limited to a few markets. For example, the coefficient on CensusTop4 is 0.0009, and is statistically significant. These results indicate relations between profitability (ROA) and the changes in concentration levels (TableI) are driven primarily by the positive effect of product market concentration on profit margins, and not by efficiency gains. Industry is defined using six-digit NAICS code. See Sections 2.1 and 3.1 for dataset description, and Appendix A for details of variables construction. The coefficients on the number of firms and the concentration index are also close in magnitude to their values in the original specification, tabulated in TableII panel C. The coefficients of log(1+Import) and log(1+Intersales) are in general mixed, and have a positive sign when significant. Introduction Whether you are beginning to develop a QPCR assay, have a QPCR assay you want to optimize, or are getting questionable results and don't know why, this guide is for you. However, our analysis effectively rules out the explanation that, in competitive markets, changes in the optimal distribution of firm size can lead to increases in concentration levels without affecting profit margins. In this subperiod, both the Lerner Index and the Asset Utilization ratio increase as industries become more concentrated (TableII panels C and D, respectively). That means that more C and D will react to replace the A that has been removed. Changes in concentration levels are calculated from year t-2 to year t-1. Temperature is another factor that can affect the rate of a reaction. Similar to the analysis reported in TablesI and II, we find that industry concentration has a positive and statistically significant impact on ROA. Study with Quizlet and memorize flashcards containing terms like Which of the following is NOT a thermodynamic reason a process or reaction (reactant product) could be endergonic? Our papers findings are relevant to both several strands of the academic literature and to the pragmatic interests of policymakers. This phenomenon is summarized by Le Chtelier's principle: if an equilibrium system is stressed, the system will experience a shift in response to the stress that re-establishes equilibrium. We demonstrate that this increase in concentration levels has significant implications for firm performance, namely profitability, merger gains, and returns to investors. We also decompose the changes in the number of public firms by sources of entry and exit to address the possibility that the increase in industry concentration could be driven by industries shrinking due to declining demand, which, in turn, leads to fewer participants in the market. Second, horizontal mergers in more concentrated industries elicit stronger market reactions, which supports the claim for market-power considerations becoming a key source of value during these corporate events. in the rate of the reaction. See Sections 2.1 and 3.1 for dataset description, and Appendix A for details of variable construction. For most reactions increasing the concentration of the reactants will increase the rate of the reaction. These results suggest that complex technology also facilitates synergy potentials and increases barriers to entry. For example, we use the share of the top four firms reported in 1997 for the observations in years 1997, 1998, 1999, 2000, and 2001. During recent administrations, antitrust enforcement has weakened. Panel A presents the HHI concentration index for all US publicly traded firms that appear in the CRSP-Compustat merged dataset (see Section 2.1 for details). The rate of a chemical reaction is influenced by many different factors, including reactant concentration, surface area, temperature, and catalysts. To construct the index, within every NAICS three-digit industry-year we sum up the squared ratios of firm sales to the total industry sales. For value-weighted returns, we sum up the market value of equity of all firms within an industry to obtain total industry weight, and calculate value-weighted returns for each of the two portfolios. 1 in the (, r) space.When r is below the solid curve (but above 1), a production cartel benefits consumers since it induces firms to expand their output level above the level they produce under competition. In this case, the measures of concentration based on only public firms would seem to point to an increase in concentration, despite the actual concentration having changed only slightly. Because of the increased viability at day 14, the three combined nucleoside culture achieved a mAb concentration of 9.2 g/L at day 16. The results are presented in TableIX. As early as 2000, the USDA Economic Research Service published a special report pointing to an unprecedented consolidation of supermarkets that created a small group of de facto nationwide food retailers by bringing together regional chains.8 Together, the evidence indicates that the consolidation trend has continued over the last 20years: While the revenues of the top four firms have increased from 18.3% in 1997 to 26.9% in 2012, the industry has lost over two-thirds of its publicly traded firms, and its HHI has more than tripled. This evidence suggests that the higher profit margins realized by firms during this recent increase in industry concentration have been reflected in higher returns to shareholders. The efficiency hypothesis predicts that the increased profitability will be driven primarily by improvements in operational efficiency, and in the absence of competition, at least part of this surplus will result in increased profitability. Industry is defined using a firms three-digit NAICS code. piece of zinc metal in here in a flask that contains To control for potential time-series dependence in the residuals, we cluster the standard errors at the firm level. Panel B shows the number of publicly traded firms in CRSP database since the beginning of its coverage in 1925. Total real capital stock (CAP) divided by total employment (EMP). While we find that the relative importance of public firms has not declined despite the decrease in the number of public firms (see Figure O-A.2 in the Online Appendix), our analysis might neglect a relevant dimension by investigating only publicly traded firms. The glow from a glow stick comes from a chemical reaction. Change in the level of product market concentration and profitability. We first investigate changes in industry concentration levels over time. Overall, the results consistently point to an increase in product market concentration over the past two decades. The relation between ROA and our proxies for industry concentration levels is only positive and statistically significant across all measures during the later subperiod, 200114. The rate of a chemical reaction is influenced by many different factors, including reactant concentration, surface area, temperature, and catalysts. In fact, evidence exists for the correlation between these two variables being negative over the period 197286. While the positive alphas during the period 201114 are robust to a multitude of benchmark portfolios, we recognize that using the evidence based on Compustat measures of concentration might not rule out certain alternative explanations for this set of results. Panels B and C depict aggregate ROA for nonfinancial and financial firms (NAICS two-digit sector code 52), respectively. In Section 3 of the Online Appendix, we show that the wedge between accounting and economic profits is driven by the two determinants of capital payments: the price of capital and the capital share. 1 Le Chatelier's principle: effect of adding a component. The data are obtained from BLS, and are available for each of the following sectors: Agriculture; Forestry and Fishing; Mining; Construction; Manufacturing; Transportation, Communication, and Public Utilities; Wholesale Trade; Retail Trade; Finance, Insurance, and Real Estate; and Services. Total sales (SALE) divided by total assets (AT). hydrochloric acid increases, there are more acid particles to collide with the piece of zinc. Note that under both scenarios, firms profitability levels should be positively correlated with industry concentration levels. Under capitalism the condition for concentration of . The rationale for this conclusion is that, with all else constant, mergers in concentrated markets are more likely than mergers in competitive markets to further reduce competition. That competition promotes efficient allocation of resources is a fundamental argument of economic theory. Our findings can encourage policymakers around the world to pursue different avenues of investigation into the impact of increased concentration. In Figure1 panel B we use the number of public firms as another proxy for concentration. Concentration In a reaction involving solutions, if the concentration of a solute is increased, the equilibrium position moves in the direction away from this solute. The latter effect should become more dominant as competition declines. Posted a year ago. Industry is defined using a firms three-digit NAICS code. the hydrogen peroxide. Trends in aggregate ROA. An important and still unanswered question is whether market participants have recognized the higher profitability of firms associated with more concentrated industries. This increase in the rate of the forward reaction pushes the equilibrium farther towards the products. To capture this effect, we calculate the cumulative abnormal return (CAR) of the combined firm over a 3-day event window [1, 1] around the announcement of merger. Search for other works by this author on: Geneva Finance Research Institute, University of Geneva. Aggregate ROA is equal to the aggregate operating income before depreciation scaled by the aggregate book value of assets. The absence of private firms in this measure is a potential weakness of the Compustat-based HHI. by adding a catalyst. Because the census-based HHI is not available for non-manufacturing industries, we also look at the share of the top four firms in terms of sales in each NAICS three-digit industry, which is also census based. All rights reserved. I don't understand what it does. Previous studies examining earlier periods find weak or no correlation between these variables (e.g., Domowitz, Hubbard, and Petersen, 1986a, 1986b, 1987; Schmalensee, 1989). Alternatively, significant barriers to entry, including economies of scale, technological barriers, and large capital requirements, should cause firms operating in increasingly concentrated industries to exercise market power and generate larger abnormal profits (e.g., Bain, 1951, 1956). Foreign firms can ship their products into the USA in the form of imports, or operate and sell directly out of the USA. The sample consists of M&A transactions over the period 19802014. Following Aghion et al. Our contribution to this debate is two-fold. The liquid passing to the permeate side results in a proportionate increase in the product concentration on the feed side of the membrane. We first control for import penetration, which is one of the most common measures of foreign competition (e.g., Katics and Petersen, 1994; Borjas and Ramey, 1995; Cuat and Guadalupe, 2009; Irvine and Pontiff, 2009; Autor, Dorn, and Hanson, 2013; Acemoglu et al., 2016). Similar to the analysis of profitability, we verify the robustness of our M&A results to alternative industry definitions, and find that our conclusions remain unaffected (the results based on NAICS four-digit industry definition, as well as industry classification based on text-based analysis, are tabulated in the Online Appendix). Federal Reserve officials were divided over the need for more interest rate hikes at the U.S. central bank's July 25-26 meeting, with "some participants" citing the risks to the economy of pushing . However, our measure of efficiency, widely used in the literature (see, e.g., Nohel and Tarhan, 1998; Ang, Cole, and Lin, 2000; Patatoukas, 2012; Irvine, Park, and Yildizhan, 2016), is not significantly higher in more concentrated markets. In other words, most jobs are currently being created by large and established firms, rather than by small entrepreneurial firms, consistent with the evidence in Decker et al. when does the concentration just effect the rate of reaction, and when does it also effect the volume of products? HHIj in industry j is defined based on NAICS three-digit industry classification and is constructed as described in Appendix A. gases react more readily than liquids, which react more readily than solids. The addition of the Section 1.A of the Online Appendix discusses the differences in industry definitions based on three versus four-digit NAICS code, and shows that the profitability results are robust to the use of four-digit NAICS as a more granular industry definition. Since NBER-CES data stop in 2011, our sample period is 200111. For equally weighted portfolio returns, we average across industries in each portfolio. Catalysts. Number of Firms is the total number of public firms in an industry. Created by olivia_filean Terms in this set (31) Select all the statements that correctly describe what happens when a stress is applied to a system at equilibrium.
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