Very real progress on the market concentration debate

As you might expect, it is coming from Chang Tsai-Hsieh and Esteban Rossi-Hansberg, here is their abstract:

The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10% firms, but is present for the bottom 90% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. We argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. We present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.

This is likely to prove one of the most important papers of the year, here is the pdf link.  The authors open with the example of The Cheesecake Factory, and also health care:

The standardization of production over a large number of establishments that has taken place in sit-down restaurant meals due to companies such as the Cheesecake Factory has taken place in many non-traded sectors. Take hospitals as another example. Four decades ago, about 85% of hospitals were single establishment non-profits. Today, more than 60% of hospitals are owned by forprofit chains or are part of a large network of hospitals owned by an academic institution (such as the University of Chicago Hospitals).

And:

…rising concentration in these sectors is entirely driven by an increase the number of local markets served by the top firms.

Here is a key point:

…we find that total employment rises substantially in industries with rising concentration. This is true even when we look at total employment of the smaller firms in these industries. This evidence is consistent with our view that increasing concentration is driven by new ICT-enabled technologies that ultimately raise aggregate industry TFP. It is not consistent with the view that concentration is due to declining competition or entry barriers, as suggested by Gutierrez and Philippon (2017) and Furman and Orszag (2018), as these forces will result in a decline in industry employment.

This is interesting too, and it departs from say what Amazon is doing:

…we show that the top firms in the economy as a whole have become increasingly specialized in narrow set of sectors, and these are precisely the non-traded sectors that have undergone an industrial revolution. At the same time, top firms have exited many sectors. The net effect is that there is essentially no change in concentration by the top firms in the economy as a whole. The “super-star” firms of today’s economy are larger in their chosen sectors and have unleashed productivity growth in these sectors, but they are not any larger as a share of the aggregate economy.

The paper is titled “The Industrial Revolution in Services.

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A couple of years ago, I was in Denver on vacation so my wife and I drove downtown and found a parking place on Larimer, the old timey frontier street with lots of expensive boutiques. We parked right in front of a hat shop, and I needed a hat to keep the high altitude sun off me on vacation, so we went in to the local high-end hat store.

To my surprise it turned out to be part of the same national high-end hat store chain as the high-end hat store I walk by in the San Fernando Valley all the time.

This kind of thing happens far more today than 20 years ago, much less 40 years ago.

What now seem odd are the industries that haven't nationalized. For example, supermarkets are still pretty regional, for reasons I can't call to mind.

Walmart is the biggest grocer in the nation, and they are pretty much everywhere. I believe that Kroger Co. is almost as big as Walmart, but in acquiring different chains throughout the country, they haven’t changed the names or branding of those companies. They own Albertson’s (SW), Harris Teeter (SE), and Kroger’s (Great Lakes), and some other chains I think.

Kroger owns several chains on the west coast, including Ralphs and QFC and Fred Meyer, and collectively they're the largest group of supermarket chains.
https://www.kroger.com/topic/kroger-family-of-companies

Albertsons though is owned by a separate national company, they merged with Safeway (called Vons in southern Calif) a few years ago. They're the second largest supermarket chain now, after Krogers.

The buyouts over the years made my head spin, reminiscent of what happened with banks in the late 20th century. There's another chain in southern California called Pavilions that had a store across the street from a Vons in South Pasadena. Pavilions got bought up by Safeway/Vons, but for some reason the company kept both of those stores open. Owned by the same chain, similar except that Pavilions was a bit more of an upscale brand, and yet for years those two stores kept operating side by side. (I looked on google maps, I see the Vons finally closed and seems to have been torn down and replaced with a Chase Bank.)

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Rings true.
Just, alas, the surviving firms in retail food don't sufficiently capture my tastes. Always thought it's my neighbors' tastes and budget constraints that have been the problem. Now I learn that increasing total factor productivity, a measure of our ignorance, has made my problem worse.

Agreed. Efficiency is not the first thing I look for in a restaurant. These big chains should be renamed from eating establishments to "re-heating" establishments because they don't cook real food but heat up something that comes frozen in a plastic bag from SYSCO or US Foods. Maybe I'm old fashioned, but the relaxed pace of a diner that cooks real food is fast enough for me. Another reason to pull from Tyler's playbook and visit local ethnic eateries.

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'Yes, there are fewer players in the market which, on its face to any sensible person sounds bad, but don't worry we have statistics to show that it's actually really great.'

So we've gone from the local grocer to larger players. This in itself doesn't sound bad as it does probably bring about efficiencies. Most of these gains go to the consumers as the grocery business continues to have very tight margins. I'd be worried if there were very few choices. Most folks can go to Walmart, Costco, BJs, Sams club, Trader Joes, Whole Foods, or Aldis as examples of national firms (availability varies for the smaller of these). Most people also have their choice of local and regional players as well. My house buys groceries from 4 different stores on a monthly basis. There doesn't seem to be a shortage of competition. Even the dollar stores put some competitive pressure on the grocers.

The local grocery stores in the couple different cities I've lived in have been nothing to write home about. Give me a Wegman's any day of the week.

Looks like Wegman's is a regional store. We do alot in our regional store as well. The local one we go to is good for basics at a good price.

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One of the ICT technologies retailers use is consumer scoring. The same way that Google and Facebook track you on the web, online retailers like Home Depot, Walmart, and Expedia are doing the same thing. They can price discriminate, prevent returns, and even stop from shopping with them in the first place. For something like taking out a mortgage, I can understand the scrutiny but here you are basically audited for ordering next week's toilet paper. It's corporate America's version of China's social credit score and it's creepy as hell. [1]

One guy bought $5k worth of stuff at Best Buy and returned 3 things, gets flagged by The Retail Equation, a consumer surveillance firm, and is no longer allowed returns for a year [2]. Read the reviews on Yelp about these guys [3].

Needless to say, this adversarial way of commerce is exhausting. I could give two sh_ts about industry aggregate Total Factor Productivity.

[1] https://www.mercurynews.com/2019/06/25/ftc-urged-to-probe-secret-surveillance-scores-used-against-shoppers-job-and-housing-applicants/

[2] https://www.nbcnews.com/business/consumer/stores-use-secret-shoppper-score-track-decline-returns-n856206

[3] https://www.yelp.com/biz/the-retail-equation-irvine

The anonymity of cash payment negates consumer scoring. Pay with real money. (Or at least as real as it gets.)

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Maybe you could sell him consumer crime vouchers?

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This reminds me of the old Vegas black books which were originally used against the mob and cheaters but expanded to include legal non-cheats including card counters, people who were a little too good, and other advantage players.

https://en.wikipedia.org/wiki/Black_Book_(gambling)

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Solution: Shop at stores that do things your way and pay more.
Hint: If you want things as cheap as possible, you have to pay the price, which is not getting the special treatment that you feel you deserve.
BTW, don't believe everything everyone says, including chain stores. They just want your money. They don't genuinely care about you and your feelings as a fellow human being or your customer satisfaction. Indeed, I would venture to guess that they are pleased that you are not going to shop with them anymore (although I doubt you won't by back asap hunting for bargains).
Or, if you have built a better mousetrap, the world will beat a path to your doorstep. Open that store comrade. You only have your chains to loose.
Stick it to The Man.
BTW, You don't get what you don't pay for, unless you take it by force or class-action suits.
As I often do, I'm going to recommend a book: Soul on Ice, by Eldridge Cleaver.

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As long as you're using 4-digit SIC codes (or, really, any kind of SIC codes) and assume that all markets are local, you're really just running fancy econometrics on meaningless statistics. Garbage in, garbage out.

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"it departs from say what Amazon is doing:

…we show that the top firms in the economy as a whole have become increasingly specialized in narrow set of sectors, "

You confuse the large number of distinct items from Amazon with Amazon doing just two or three things well. Think of Amazon like the Post Office: it moves millions of items from many to many every day. Initially it was like a switch in the middle of two Post Office mailings. You order a book or five, and Amazon would order them, with others from hundreds of book sellers, shuffle and pack and ship by Post Office to you.

Some books sold at rates to allow ordering in the hundreds and storing for a while before shipping. When it expanded beyond books, nothing changed, except the need to be more versatile in the size, mass, shape of products.

The innovation of Amazon was ddoing as a few ealier companies did: turning internal tools/services into product offerings. AWS is an internal tool Amazon sells to others as a service. The order taking and logistic is offered as a marketplace service: deliver your products to Amazon and they get shipped without you even needing to find customers.

Amazon is insourcing more and more shipping and delivery, but its competing in effect with Deutsche Post which have expanded into "mail" related services like printing. Of Fedex that has expanded into logistics/warehousing.

Amazon has not gone into manufacturing. Unless you consider the Amazon version of Netflix (built on AWS) movie production as manufacturing.

In contrast, Tesla is now about 80% vertically integrated. Raw materals go into Tesla factories to make most parts which get assembled in cars Tesla delivers directly to customers. Tesla found that it was too small to get enough service from seat makers, so Tesla bought or built seat factories. Obviously lots of parts are standard like nuts, bolts, screw, cameras, sensors, but beyond those, Tesla makes them.

While the GM of old did this, Tesla comes from the electronic industry so a part is designed for all Tesla cars whenever possible, instead of the same but different parts for each Chevy, Buick. Light bulbs, especially headlamps were a dictated Federal standard so cars would be safe to drive because lamps were easily found. Just as screws are standard because the military dictated it.

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The Cheesecake Factory and Catholic hospitals turned into for-profit ones by private equity are not the greatest examples as prices there have only been going up. While the employment numbers look promising, I didn't see much in the paper about consumers benefiting from these productivity gains.

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A silver lining can be found in every black cloud if one looks hard enough.

To paraphrase St. Paul, liberalism has become all things for all people to dislike. Is liberalism (1) a check on the power of government (the meaning in the late 18th century and most of the 19th century) , (2) a check on the power of big business (the meaning in much of the 20th century), or (3) a belief system that champions civil rights, the environment, and social welfare (the meaning in the late 20th century and the 21st century). Cowen dislikes "liberalism" when it's (2). The angry birds dislike "liberalism" that foregoes (2) in return for (3) (a/k/a the liberal world order). Why do you dislike "liberalism"?

Because of snotty preening posts like this one.

Sick Burn!

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"Why do you dislike "liberalism"?

Because in the mid 20th century it turned into an authoritarian institution.

A funny day to say this, but hey, take your solace where you can.

Most people go to the cute puppy videos

Yes, a good day. Wonder if Biden drops out.

Your silo must dig all the way to China. Ah well, this is where we really separate the sheep from the goats. The evidence against Trump is plain, the lack of evidence against Biden is equally plain. Literally the only reason to "believe" today is about Biden is that pretending to believe that is the only move left. For the goats.

"The evidence against Trump is plain" The lack of evidence is plain. Did you not see the released transcripts today?

As for Bide, he bragged about his obstruction -"I looked at them and said, ‘I’m leaving in six hours. If the prosecutor is not fired, you’re not getting the money.’ Well, son of a b—-. He got fired.".

How many of these phony attacks on Trump that backfire do you need to endure to get a clue?

Well, just to annoy you a bit further. One of has been the Superforecaster(*) in this group, and it isn't you. We are getting *all* the malign, authoritarian, incompetence, I talked about in 2016.

Now it's in plain sight.

Of course some people will be on board with malign, authoritarian, incompetence and they will parrot malign, authoritarian, incompetent talking points.

This too will pass.

* - Should I set up a Patreon? Surely I have given you better value than public intellectuals like Peter Thiel or Jordon Peterson. You heard it here first.

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We should also note the strategic lunacy of this talking point. Saying Biden is as bad as Trump implies that we just #cancel them both.

No problem, right?

I'm saying Biden is worse than Trump. DT has worked out better than I expected. He wasn't my first choice. My hope is that he takes Nikki Haley on as VP and Haley then is POTUS for another 8.

If I'm going to check myself, it is because I have been right this whole time. We really did end up in impeachment. The checks and balances, short of impeachment, did not hold.

So, should I really expect my streak to continue? I'm afraid so.

This is a leopard who should have changed his spots a year-and-a-half ago. The fact that he can't change, even as he hits the wall, explains it all.

He's going down hard.

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Trump turned out worse for me. I'm a blue state Republican so his tax "cuts" ended up raising my taxes. Out he goes.

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". Four decades ago, about 85% of hospitals were single establishment non-profits. Today, more than 60% of hospitals are owned by forprofit chains or are part of a large network of hospitals owned by an academic institution (such as the University of Chicago Hospitals)."

This seems like an under-reported change. It is a little muddy, combining as it does for-profit and university hospitals, but still.

If we have had the *combination* of greater public funding and greater private operation, yeah, I could see how that serves to increase costs.

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The costs of these complex systems drive concentration. They both allow and require a large number of stores and a large market to function. The canadian experience is illustrative; our large and cross country grocery chains are small compared to the US operations; Sobeys is 24 billion a year, Kroger 121 billion. Walmart 514 billion. These relatively small operations have had technology rollouts that have failed or damaged their operations. Larger operations can afford expensive teams of developers to implement their complex management systems.

Amazon seems to be the other way; they are a technology company and have built markets to use the capability, so they don't look like the others. Their 'chosen sector' is technology, and their various businesses are consumers of their base product.

+1

I suspect you see the same thing in retail banking, where the IT costs are making it very tough on community banks and small credit unions.

They outsource their IT to outfits like Fiserv. Since they all seek to minimize costs, they end up with staff that just do the bare minimum and are susceptible to mistakes.

https://krebsonsecurity.com/2018/08/fiserv-flaw-exposed-customer-data-at-hundreds-of-banks/

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For brain reasons this brought to mind that lady - she'd be dead now - who faithfully reviewed the restaurants for her local paper for decades. Somewhere in the Midwest? She reviewed every new restaurant that opened in her county. She tried to be as generous as possible as it was a small town and the employment opportunities were valuable, as was the chance to eat out where pickings were slim.

For some reason, it came to the national media's attention that she filed reviews of McDonald's and, ya know, whatever were the other chains of the day: Bonanza or Pizza Hut or whatever. Because that was what mostly came along.

They thought that was funny.

Didn't she know better than to review a Red Lobster?

As far as I know there has still been no corresponding concentration in restaurant reviewing.

In that spirit, I will offer a review of California Pizza Kitchen. I think it's my only fast-casual experience. An older friend of mine had been wanting to take me there for lunch - she and her husband eat there all the time. It's in a dead corner of the nearby death-spiraling mall and so is easy for them to park.

I don't remember what I had. It was fine. I was surprised the entrees were like $16. I don't remember exactly what she got either - a salad, I think, which I finished - and then she wanted dessert. This kind of made my heart sink, but we split the key lime pie. Here is where I must eat my doubting words. That pie was fantastic. Non-standard. She told me the waiter claimed that the California Pizza Kitchen paid $1 million for the recipe.

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"I estimate that oligopolistic behavior causes a deadweight loss of about 13% of the surplus produced by publicly traded corporations. This loss has increased by over one third since 1997, and so has the share of surplus that accrues to producers. I also show that these trends can be accounted for by the secular decline of IPOs and the dramatic rise in the number of takeovers of venture capital-backed startups. My findings provide empirical support for the hypothesis that increased consolidation in US industries, particularly in innovative sectors, has resulted in sizable welfare losses to the consumer." https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3329688

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Yes, but the internet allows direct to consumer sales eliminating wholesale and retail.

Is Waffle house anything more than retail?

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