The Anatomy of Concentration: New Evidence from a Unified Framework

Part of the Lubar Research Seminar Series

Speaker: Kenneth Ahern, Associate Professor, Marshall School of Business

Concentration is determined by two opposing forces: the number of firms in a market and the evenness of their market shares. To compress these forces into a single summary statistic, standard measures of concentration, including the Hirschman-Herfindahl Index (HHI), make implicit assumptions about the relative importance of each force. This paper introduces a generalized measure of concentration that explicitly parameterizes the relative importance given to each force. Using this measure, we show that the widely cited evidence of increasing industrial concentration relies on HHI’s overweighting of evenness and underweighting of firm counts. Using an alternative, equally-weighted measure that has equivalent theoretical implications as HHI, but possesses superior statistical attributes, we find that employment concentration decreased from 1990 to 2020, in contrast to conventional wisdom. These findings raise doubts about the widespread belief that markets have become less competitive.