Industry Concentration and Interest Rates

What's the long face
What's all the crying for
Didn't you expect it
When you opened the door
--Bruce Hornsby & The Range

Concentrated industries are dominated by a few key players. More precisely, concentrated industries are those where most of the market share is controlled by a few operators.

Measures such as the CR4, which reports the market shares of the largest four operators as a percentage of the overall industry, estimate industry concentration. A general rule of thumb is that when CR4s surpass 60%, then industries are sufficiently concentrated to foster anti-competitive behaviors such as price collusion and regulatory capture. Such behaviors serve to shield large incumbent franchises from competitive pressures applied by smaller, more nimble rivals. Such behaviors also discourage entrepreneurial entry.

Although I do not have CR4s in front of me to verify this, there is little doubt from where I sit that industries have been growing more concentrated over the past few decades.

There also can be little doubt that a key driver of higher industry concentrations has been the lower interest rate regime of the last thirty years fostered by the Federal Reserve. Since 1980, yields on 10 year Treasury notes have fallen from above 15% to under 2%. That's a near 90% decline in borrowing costs facilitated by central bank policy.

It takes no genius to grasp the effect of secular interest rate decline on industry concentration. Cheap money makes it easier to borrow and build. Large operators that already enjoy economies of scale can leverage size advantages even more by adding additional capacity.

More importantly, cheap money makes it easier to borrow and buy. Large operators can buy capacity and market share by purchasing competitors. Merger and acquisition booms are fueled by cheap credit.

Sadly, many people who rail against 'Big Business' also support, or are at least neutral to, low interest rate policies of the federal government. These people turn blind eyes to the linkage between Big Business and the state.