INSIGHTS pieces
Concentration in the EU: where is it increasing and why?
Pauline Affeldt, Tomaso Duso, Klaus Gugler, Joanna Piechucka

An increasing body of empirical evidence documents trends of rising concentration, profits, and markups in many industries around the world since the 1980s. Two major criticisms of these studies are that concentration and market shares are poorly measured at the national industry level and that firm level revenues are a poor indicator of product sales. Indeed, because of data limitations, almost all existing studies measure concentration based on industry classifications and/or on firm balance sheet data, mostly aggregated at the national level.

This is highly problematic. Industry classifications of products may be either too large or too small in an antitrust sense. They may be too large since they include products that may not be substitutes, thus potentially including suppliers, customers, and non-competitors. They may be too small if they do not include relevant substitutes. Like the product market dimension, the geographic dimension of national industry-level aggregates may also be either too large or too small. They may be too small if relevant markets are actually at a supra-national level, such as worldwide or other groups of countries, or they may be too large if markets are actually more local than national. Even using more disaggregated data, such as census data, at the regional level does not completely solve this problem as market definition often does not coincide with geographic boundaries.

In a recent study, BCCP Fellows Pauline Affeldt, Tomaso Duso, and Joanna Piechucka, along with co-author Klaus Gugler, propose assessing the issue of concentration by using a completely different data source. They base their analysis on a novel dataset constructed by analyzing the merger control decisions of the European Commission. They collected information on almost the complete population of DG COMP merger decisions from 1990 to 2014, generating a dataset comprising 5,196 merger decisions. Since in each merger case potentially different markets – either in terms of products or in terms of geography – are affected, the final dataset contains 31,451 antitrust markets. Yet, because market shares are not always or fully reported, concentration measures can only be calculated for around two-thirds (over 20,000) product/geographic antitrust markets affected by over 2,000 mergers.

With this data at hand, they show that the concentration measures in these relevant antitrust markets are larger, by a factor of four to ten times, than what the literature documents so far. They also confirm that concentration has indeed increased over time, on average. However, they document that there is a great deal of heterogeneity across several dimensions. The extent of the geographic market as well as the broad sector of activity play a crucial role in this assessment.

Concentration appears to have increased more in broad worldwide markets than in more narrowly defined national markets. Moreover, concentration seems to have increased more in the service sectors than in manufacturing. Even within these broad sectors, they observe quite some heterogeneity across and within industries.

They further identify important elements that correlate with these concentration measures.  Most importantly, barriers to entry are unambiguously positively correlated with concentration, irrespective of time periods, sectors of activity, and geographical market dimension analyzed. Although strict past merger enforcement negatively correlates with concentration, it appears that this correlation was stronger in the 1995-2004 period than thereafter. The intangibility of investments displays a consistent positive correlation with concentration only for wider than national – EU and worldwide – services markets. In contrast, it is negatively correlated with concentration in national markets.

Their main conclusion is that a strict merger and, more generally, competition policy enforcement that reduces barriers to entry are key tools to keep markets open and competitive. However, tearing down barriers to entry is not the sole task of antitrust authorities. Other policy areas such as regulation, institutions setting norms and standards, as well as international cooperation agreements must contribute. Notwithstanding this conclusion, there are circumstances in certain antitrust markets – such as high intangible asset industries in geographically wide services markets – where increasing concentration may indeed be likely related to increasing efficiency. It is the task of antitrust authorities to strike the delicate balance between these forces.

Pauline Affeldt (DIW)
Tomaso Duso (DIW)
Klaus Gugler (Vienna University of Economics and Business)
Joanna Piechucka (DIW)

This text is jointly published by BSE Insights and BCCP.

The full paper “Market Concentration in Europe: Evidence from Antitrust Markets” is available as DIW Discussion Paper No. 1930.

This piece also appeared as a promarket column and as a DIW Wochenbericht (in German).

Authors

Tim Lohse 

Salmai Qari

TEST

Say researchers are interested in thorough and truthful answers to a questionnaire. How can they incentivize respondents to provide such answers? Simple monetary incentives do not work: paying more for longer answers would incentivize babbling. More generally: in many social or market interactions, requests of economic significance can not be accompanied by common economic incentives.

One approach to such situations is to choose the language of a request strategically. Bruttel et al. (2021) study how adding the phrase “thanks in advance” to a request affects effort in answering a questionnaire. In a simple lab experiment, they ask participants to explain their behavior in a previous task as thoroughly as possible. The treatment difference is whether or not participants additionally see the phrase “thanks in advance.”

Surprisingly, participants exert less effort when seeing the phrase “thanks in advance.” They spend 30 to 50 seconds less on answering the question and tend to write shorter answers. This result shows that even tiny lapses in language can have noticeable consequences on cooperation in such a small-stakes environment, underlining the importance of considering language carefully – in any context.

Why do they react in this way? Possibly, participants could feel that using this phrase is impolite and react reciprocally. However, participants across treatments rate the phrase as very polite and react negatively nevertheless. Alternatively, it might feel like the researchers really do expect them to fulfill the request, leaving them no choice. Then, the participants might react negatively to this reduction of their autonomy.

Lisa Bruttel (University of Potsdam)
Juri Nithammer (University of Potsdam)
Florian Stolley (University of Potsdam)

The paper, titled “’Thanks in Advance’ - the Negative Effect of a Polite Phrase on Compliance with a Request,”can be viewed here and is forthcoming in the German Economic Review. 

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