Who Benefits from Industrial Concentration? Evidence from U.S. Manufacturing

Abstract

This article estimates the impact of industrial concentration on aggregate welfare as well as consumer and producer surpluses taking into account market power and cost efficiency effects. Using a sample of 232 U.S. manufacturing industries, empirical results indicate that an across-the-board increase in concentration would enhance aggregate welfare in 69 % of the industries due to widespread efficiency gains, although these accrue mostly to producers and are not passed on to consumers. Further results indicate that greater concentration is likely to enhance aggregate welfare in industries with low or moderate initial concentration that exhibit economies of scale and have greater exposure to international trade. However, consumers benefit only from increased concentration in industries whose initial levels are low and which face more import competition, lower exports and smaller markets. Producers benefit in symmetrically opposite ways, except for the case of low initial levels of concentration. In the absence of government intervention, Pareto improvements wherein everyone benefits from greater concentration are only guaranteed in industries with low levels of initial concentration in which efficiency gains yield price reductions that benefit consumers as well as producers.