Rising Corporate Concentration Continues a 100-Year Trend

While a few big companies often make headlines, research finds that talk about those belies a wider trend: many industries have grown more concentrated—such that bigger companies (not just the giants) make up an increasingly larger share of the economy.

This is not a contemporary phenomenon. Harvard PhD student Spencer Yongwook Kwon, Chicago Booth’s Yueran Ma, and Leibniz Institute for Financial Research’s Kaspar Zimmermann find that the trend has been in place for a century. They calculate that since the 1930s, the share of the US economy dominated by the top 1 percent of companies (when sorted by assets) has increased to 90 percent, up from 70 percent. Meanwhile, the asset share of the top 0.1 percent of companies has risen to 88 percent, up from 47 percent.

Over 150 years ago, Karl Marx conjectured in Das Kapital that rising concentration could be a feature of industrial development and postulated that technological development would increase economies of scale—and those would be reflected by the size of businesses, Nobel laureate George J. Stigler wrote in 1958.

“People have been focusing on the special features of the past few decades. In the meantime, we find that the US economy is continuing its historical development,” Ma says. “I wouldn’t go so far as to say that there’s nothing new under the sun, but rising concentration in production activities has been the norm for the past century.”

To measure concentration, the researchers collected data from 1918 to 2018 using annual Statistics of Income publications by the Internal Revenue Service. These statistics cover all corporate businesses in the economy. The IRS recorded company size by profits from 1918 to 1975, size by sales from 1959 to today, and size by assets for the longest stretch, from 1931 to the present. This set of data was also the basis for Stigler’s work on economies of scale in the 1950s, which the researchers looked up after coming across library microfilms of historical Statistics of Income data with the mark “Property of George Stigler” in the University of Chicago library.

Higher and higher

Rising concentration was stronger in manufacturing and mining before the 1970s, consistent with the spread of mass production in these sectors. It was stronger elsewhere after the 1970s, as modern information technology transformed different sectors.

The share of economic activities accounted for by the largest companies has increased persistently over the past century by all three measures. In addition to their growing asset concentration, today’s top 1 percent of companies by sales account for 80 percent of revenues, compared with 60 percent in 1969, the researchers find. While the share of net income has grown more erratically, the overall trend is similar: by 1975, the top 1 percent of companies by net income were taking in about $8 of every $10 earned by corporations in the United States, up from $6 in every $10 five decades earlier.

The long-term trends of rising corporate concentration seem to reflect increasingly stronger economies of scale (similar to the conjectures by Marx). In particular, the data indicate that rising concentration was stronger in manufacturing and mining before the 1970s, consistent with the spread of mass production in these sectors. Rising concentration was stronger in retail, wholesale, and services after the 1970s, as modern information technology transformed these sectors.

More generally, the timing of rising concentration in an industry aligns with research and development and IT taking up a greater portion of total investment, the researchers find. These two areas “can be directly involved in technological changes that enhance economies of scale, or [can be] required to achieve scale production when other forces (e.g., customer preferences, transportation improvements) increase the benefits of scale,” they write. “Overall, to the extent that production processes with more scalability are associated with more R&D and IT, we can use the intensity of R&D and IT as a general indicator of firms exploiting economies of scale.”

The study finds that technology-driven economies of scale better track the broad trend of rising concentration than either globalization or changing regulations, the two other mechanisms the researchers considered.

“If you look at a particular product or service, then regulation is much more relevant,” Ma says. Recent consolidation in a particular market (such as health care) might well be a result of more lenient antitrust laws, but this is difficult to spot when looking at the whole economy, where economies of scale have been the most influential driver of concentration.

The timing for rising concentration in different sectors might also explain why big businesses’ growing dominance is getting attention today, says Ma: it’s happening in industries highly visible to consumers. As for any social implications of the wider trend, “these depend a lot on the social infrastructure of the economy,” she says. “How do we distribute surplus? How do we let employees bargain with companies? If we worry that large companies can influence politics, how do we improve democratic institutions?”

Go to businessconcentration.com, the researchers’ website, for more information and data.

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