Concentration in the EU: Where It is Increasing and Why

By: Pauline Affeldt, Tomaso Duso, Klaus Gugler & Joanna Piechucka (Pro Market)

Who does Boeing compete with? If you read academic research, thousands of firms compete in the US aircraft space/aircraft manufacturers industry. If you were to ask Delta Airlines, a potential consumer of Boeing planes, it depends on what they are shopping for. If they are shopping for planes that carry many passengers a long way, the answer would be Airbus. If they are shopping for a plane that carries 100 people a relatively short distance, Boeing would not even be on the list of options. Point being: the definition of the market matters. It matters especially when you try to measure the level of market concentration, a debate that in recent years has been at the top of the policy agenda.

In March 2017, the Stigler Center hosted a three-day conference on the question of concentration in the US economy. During the opening panel, economists mostly agreed that existing evidence highlights the problem of concentration in the US. These dynamics are worrisome, because increased concentration “drives up prices while driving down investment, productivity, growth, and wages, resulting in more inequality,” as suggested by Thomas Philippon. Since then, debates on the rising trends of market concentration, markups, and profits, as well as the declining shares of labor and investment, continue unabated. Evidence demonstrates that all this is not unique to the US, with many countries and sectors around the world affected by similar trends. Importantly, prominent work by OECD economists shows that concentration is also increasing in Europe, although to a lesser extent than in the US.

Because of data limitations, almost all existing studies measure concentration aggregating firm balance sheet data using industry classifications, mostly at the national level. This is problematic, since this aggregation does not correctly reflect the competitive interactions among firms. A market is a set of competing products located in certain geographic areas that are substitutes of one another. In antitrust law, this is called a relevant product and geographic market. This stance is reflected in the US Horizontal Merger Guidelines, as well as in the EU Commission’s Horizontal Merger Guidelines. This is not a mere technical issue, rather it determines how competitors, and thus concentration, are measured. Industries are not markets. Instead, they are defined for the sake of statistical purposes and their classification is based on production processes.

Boeing and the US aircraft industry provide a vivid example. Using industry-level aggregates boils down to assuming that airplanes compete against helicopters and dirigibles. Furthermore, national aggregates fail to put Boeing and Airbus—a European firm—into the same relevant world-wide product market of wide-body aircraft. They also fail to identify the “small jet” market, which throughout the 2010s consisted of a European firm (Airbus), a Canadian firm (Bombardier), and a Brazilian firm (Embraer). Thus, it is clear that, in some cases, industry classifications are broad enough to include not just competitors, but also suppliers, customers, and other firms that do not compete in the same market. Industry classifications may also err on the other side if they do not include all relevant competitors…