Concentration in Modern Industry

At the beginning of this century, the hundred largest firms in British manufacturing industry controlled about 15% of its net output. The biggest of these was J. and P. Coats, which had net assets of £5.5m and employed 5000 workers. The share of output held by the top hundred companies now approaches 50%. A measure of the change which has occurred can be obtained by looking at one of the smallest of these 1975 giants. Scottish and Newcastle Breweries, for example, employs 27,500 people, sells output worth £200m annually, and holds assets to the value of £150m. The largest U.K. manufacturer, Imperial Chemical Industries, has 200,000 employees and assets in excess of, £2000m. The principal concern of this book is this increasing concentration of control over industrial capital — and hence over output, sales and employment - by large corporations.

Many economists think of monopoly and competition as two polar cases, with the real world lying somewhere in between, and the degree of concentration measures whether a particular industry lies closer to one extreme or the other. The closer an industry is to the monopolistic end of the spectrum the more monopolistic characteristics will be observed, the higher prices will be relative to costs, the greater the resulting resource misallocation and welfare losses. This view has some plausibility, but it is much too vague to be considered a useful economic theory or to provide a satisfactory basis for empirical work. (This has not, however, prevented the proliferation of empirical studies in this area more or less devoid of theoretical underpinning). We must look more carefully at the ways in which high concentration might affect the relationship between prices and costs.

The economic effects of large-scale enterprise and industrial concentration have been the subject of extensive discussion, but the political and social aspects remain relatively neglected. This cannot be due to their lack of intrinsic significance. On the contrary the political and social ramifications of increasing scale are probably the most important, and some of the problems which large corporations create in the economic sphere may be better understood if we widen our analysis beyond the theory of markets to examine their impact on the internal organisation of the firm and its workforce and on political decision making in our ostensibly pluralist economy.

We define the process of concentration as an increase in the extent to which economic activity is controlled by large firms. This definition requires expansion and explanation in at least four directions. First, what are the units in which economic activity is measured — sales, assets, employment or something else? Second, what is the area in which control is exercised — the industry, the region, the economy as a whole? Third, do we mean large in an absolute sense, or simply large relative to other firms in the same industry or economy? And fourth, once we have answered these questions and assembled our data, how do we combine them in a single summary measure of industrial structure — do we use concentration ratios, or one of the many other indices which have been proposed? None of these questions are of the kind to which there are right or wrong answers: there are particular ways of answering them which are more relevant for particular purposes, and, as we have argued in the preceding chapter, there are many different reasons for being interested in concentration. It is an empirical fact that it rarely matters how we answer them. The overall pattern of concentration and its trends are much the same however we choose to measure them. (Bates 1965, and pp. 93–7 below).

It was not until the Second World War that economists began to measure market structures in Britain. For many years the partial nature of the data — and the lack of a clear understanding of the characteristics of appropriate measures — left a good deal of room for disagreement about the magnitude and direction of the long-run trend in concentration. Despite the fairly obvious facts that Victorian industry had been characterised by many small competing firms and that the modern economy was dominated by large ones, the available statistical studies were so imperfect that it was possible (though not very plausible) to argue that the first half of the century had seen little increase in concentration levels (e.g. Hunter 1969). More recently, as we have seen from Figure 1.1, the picture has become clearer. There is still room for disagreement about trends over the short term, but there is no doubt that the share of the largest 100 firms is substantially higher now than it was at the turn of the century. Before the 1960s the most conspicious period of rapidly rising concentration in the twentieth century was the 1920s, and we chose this for our pilot investigation using our suggested range of concentration measures.

The 1960s saw the most substantial wave of merger activity the British economy had experienced since the 1920s. As Figure 6.1 shows, the annual value of acquisitions increased sharply after the early 1950s, culminating in the spectacular merger wave of 1967–9 which brought together G.E.C., A.E.I. and English Electric; British Motor Corporation and Leyland; created the giant Bass Charrington brewing chain; and generated proposals (subsequently abandoned) for a massive Unilever-Allied Breweries merger to create an industrial giant in the food and drink industries. During recent decades, also, merger has caught the popular imagination as never before. The contested takeover bid, where would-be acquirers appealed directly to shareholders over the heads of a hostile management, was almost unknown before the fifties. It was still very unusual in the fifties and sixties, accounting for only a tiny fraction of all merger activity, but instances of it would generate news headlines for weeks as the battles of I.C.I. to win control of Courtaulds or of G.E.C. to acquire A.E.I. developed.

We begin this chapter by setting out a simple model of the growth of firms, normally ascribed to the French engineer Gibrat (1931) although it can be traced to Kapteyn (1903) and beyond. Suppose that in each period of time the probability that any particular firm will experience any particular growth rate is the same. Suppose that the growth performance of a firm in each period is independent of its performance in other periods: a fast-growing firm is no more or less likely than any other to grow more rapidly in subsequent years. And suppose that there is no single period which is so important in the life of firms as to remain a dominant influence on their fortunes indefinitely thereafter — there is no period whose effect cannot be thrown off, given sufficient time. If these three assumptions hold, the growth process conforms to what has become known as the Law of Proportionate Effect. The distribution of firms’ sizes will tend over time to become lognormal, and the variance of this distribution will increase steadily. A lognormal distribution is one whose logarithms are normally distributed, and its characteristic skew shape is illustrated in Figure 7.1. Its properties are described in detail in Aitchison and Brown (1957), but the proposition outlined above is easy to check.

We have in this volume described the growth of concentration in private manufacturing industry in the U.K., and analysed its causes. This is not, of course, the only sector of the economy in which large organisations have substantially increased their role in the present century. The process of concentration through acquisition which we have seen at work in manufacturing had largely run its course in banking and in rail transport at an earlier date. The refining and distribution of oil products is dominated, here as elsewhere, by a handful of multinational oil companies. Construction is still the bastion of the small firm. The advantages of large scale production are slight, the flexibility of the small organisation is especially valuable: but here too concentration has been increasing substantially (Hillebrandt 1971).