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3. increasing the concentration of Y . These results suggest that complex technology also facilitates synergy potentials and increases barriers to entry. Standard errors (reported in parentheses) are clustered at the firm level. Once again, our findings remain consistent to the inclusion of private firms in our empirical investigation, and the interaction term between the share of top four (top eight) firms and dummy variable for horizontal mergers remains positive and statistically significant. We obtain information on total sales of majority-owned foreign affiliates by industry for the period of 200213 from the Bureau of Economic Analysis (BEA), and include the total sales figures in the USA (variable Intersales), converted into logs, in the main regressions of profitability and M&A returns. Production workers (PRODE) divided by total employment (EMP). Standard errors (reported in parentheses) are clustered at the firm level. These findings suggest that the alphas documented in this paper are unlikely to be related to a risk premium, and they point to a possible market anomaly in which investors underestimate the effect of industry concentration and the corresponding increase in profit margins on stock returns. Answer (1 of 3): Current kinetic theory holds that the rate of a reaction is proportional to the concentrations[activities] of the components in the rate determining step to the activated complex. However, our analysis effectively rules out the explanation that, in competitive markets, changes in the optimal distribution of firm size can lead to increases in concentration levels without affecting profit margins. hydrochloric acid solution, we would observe more hydrogen gas bubbles coming out of our flask. If you add energy, you favour the product forming reaction. We test these predictions in Section 3.2. This result is consistent with the findings by Doidge, Karolyi, and Stulz (2017) who estimate the listing gap of the US publicly traded firms and find that the structural break, where the listing gap started to arise, occurred in 20002001. Each proxy corresponds to a different form of foreign competition, as outlined above. To keep the level of industry granularity consistent across all variables in the analysis, we use concentration measures based on 6-digit level NAICS. Increased health insurer concentration could result in lower premiums to employers and consumers along two pathways: having efficiencies from economies of scale and insurers' negotiating. Every year we separately rank all firms based on each measure of concentration. Created by Jay. Efficiency and competition in the airline industry, Merger enforcement across political administrations in the United States, Product market synergies and competition in mergers and acquisitions: a text-based analysis, Text-based network industries and endogenous product differentiation, Industry concentration and average stock returns, Customer-base concentration, profitability, and the relationship cycle, Idiosyncratic return volatility, cash flows, and product market competition. Technological changes provide another plausible explanation for the recent increase in industry concentration levels. Industry is defined using a firms three-digit NAICS code. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. If a firms operations span multiple sectors, industry boundaries become blurred, and standard classifications such as NAICS or SIC do not identify the true set of product market competitors. PDF Consolidation, Concentration, and Competition in the Food System Winsorized at 1% and 99% of the annual distribution. Since data from the US Census are available for calendar years ending in 2 or 7, using 1997 as our starting point allows for a more effective comparison between Compustat and census-based economic indicators. More recently, Autor et al. Consistent with the main results, we find that controlling for the role of foreign multinational firms does not materially change our conclusions, and horizontal mergers lead to higher announcement returns in more concentrated industries.22. When we had only one piece of zinc, the rate of the reaction was limited by the surface area of this one piece. We find similar magnitudes when we use HHI and the number of firms as alternative measures of concentration. Production worker wages (PRODW) divided by total employment (EMP). We perform this analysis by estimating alphas on portfolios sorted on the change in concentration levels. We also conduct a Wald test of a structural break at an unknown break date in the time-series of the aggregate HHI and find a statistically significant structural break in the trend coefficient around the year 2000.17 Separating the sample into alternative subperiods does not qualitatively affect any of our main results. Using the text-based HHI, we find that between 1997 and 2014 industry concentration has increased in over 60% of the firm-specific industries (untabulated). In addition, this trend indicates that greater concentration in product markets, as measured by concentration in sales, correlates with increased concentration in labor markets. Finally, whether the higher market concentration benefits consumers or other stakeholders such as employees is questionable; the increase in profit margins without a corresponding economically significant increase in efficiency suggests the opposite. While private firms are on average very small ($1.3million according to Asker, Farre-Mensa, and Ljungqvist, 2011), the possibility exists for a fraction of these firms to grow large enough to replace public firms. See https://www.census.gov/programs-surveys/susb.html. First, we use the HHI provided by the US Census Bureau, which includes revenues of both public and private firms in the manufacturing sector. To construct an annual measure, we assume that the measure stays constant until the results from a new survey are available. Lerner index is the operating income before depreciation minus depreciation, all scaled by total sales. state of matter. Winsorized at 1% and 99% of the annual distribution. Our main results are robust to these alternative specifications. However, our measure of efficiency, widely used in the literature (see, e.g., Nohel and Tarhan, 1998; Ang, Cole, and Lin, 2000; Patatoukas, 2012; Irvine, Park, and Yildizhan, 2016), is not significantly higher in more concentrated markets. The inclusion of firm-fixed effects addresses several alternative explanations, in addition to several potential endogeneity concerns. Consistent with a market-power explanation, our analysis heretofore indicates that firms operating in increasingly concentrated industries earn higher profits. the reaction of solid zinc with hydrochloric acid to PDF K and E Practice 2016 - Pleasantville High School An exothermic reaction gives off energy. Symbols a, b, and c indicate significance at 1%, 5%, and 10%, respectively. Panel A shows the relationship between concentration and profitability to be positive and statistically significant. hydrochloric acid increases, there are more acid particles to collide with the piece of zinc. Industry is defined using the acquirers three-digit NAICS code. These results reinforce the conclusion that higher profits in concentrated markets result from the presence of markups; higher profits do not result from either increased reliance on capital or improvements in efficiency. Total payroll (PAY) divided by total employment (EMP). Note that profitability is positively correlated with changes in firm size, indicating that economies of scale are an important determinant of firms profitability during the sample period. in a solution, increasing the amount of reactants increases the reaction rate. Intersales is equal to the total domestic sales of majority-owned foreign affiliates operating in the US industry is defined using the acquirers three-digit NAICS code. 1 / 27 Flashcards Learn Test Match Created by amanda_mcginness exam 2 Terms in this set (27) As the concentration of an enzyme increases for a given substrate. Figure1 panel D presents the results of calculating the share of employment in firms with 10,000 or more employees, which is the largest size-category classified by the Census Bureau.4 The trend corresponds to the sales-based analysis: Employment share by large firms in the overall economy began rising in the mid-90s and has recently exceeded previous historical peaks. Additionally, and consistent with this hypothesis, we show that related mergers are more profitable when markets are more likely to become highly concentrated. We also find that increased profits are driven primarily by wider operating margins rather than by higher operational efficiency, in line with the increased market-power explanation. Consequently, profitability should not be affected by changes in industry concentration levels because the threat of potential entrants would keep markets competitive.12 Furthermore, Sutton (1991) goes a step further to show that the presence of sunk costs such as advertising and R&D may result in declining industry profitability as concentration levels increase. The key growth . The data were obtained from Hoberg-Phillips website (http://hobergphillips.usc.edu/industryconcen.htm). We control for deal characteristics by including the market values and book-to-market ratios of the target and acquiring firms, and dummies for pure cash transactions and pure stock transactions. 2,626 Effect of Concentration Changes on Equilibrium and Product Formation As per Le Chatelier's principles, the only way for equilibrium to accept more reactants is to increase product formation. equation for the decomposition of hydrogen peroxide, which We then use the industries included in one of the two portfolios (based on the change in concentration levels) to calculate equally and value-weighted returns at a portfolio level. We find that over the past two decades profitability has risen for firms in those industries sustaining increases in concentration levels. See Sections 2.1 and 3.1 for dataset description, and Appendix A for details of variable construction. We find that, in contrast to earlier periods, during period 200114, a zero-investment strategy of buying firms in industries with the largest increase in concentration levels, and shorting firms in industries with the largest decrease in concentration levels, generates excess returns of approximately 8.2% per year, after controlling for standard risk factors. Simply bringing together all the necessary components for QPCR is often not enough to obtain accurate and consistent results. We first examine whether intensified foreign competition can provide an alternative source of rivalry to domestic firms, and ascertain, through additional tests, that cross-sectional differences in foreign competition cannot explain our main findings. Asset Utilization is defined as total sales scaled by total assets. of hydrogen gas bubbles that are coming out of the flask. breaking the piece of zinc into smaller pieces. TableI panel A reports the coefficients of Equation (1) estimated over the period 19722014. When you break something in half, the surfaces where those two pieces were connected are now new surface areas for the two objects. This development has had a number of additional implications including: (i) higher labor market concentration and its impact on wages (Benmelech, Bergman, and Kim, 2018); (ii) a decline in business dynamism and entrepreneurship (Decker et al., 2014, 2016); and (iii) a decline in capital and labor share (Barkai, 2016). Moreover, the largest portion of the distribution is concentrated in the extreme range, indicating that 73% of the industries have lost over 40% of their publicly traded peers.11. First, we enhance existing research on the relation between concentration levels and profitability. To control for potential time-series dependence in the residuals, we cluster the standard errors at the firm level. HHI is the HerfindahlHirschman index based on sales data from Compustat. We also examine M&A transactions as an alternative way to test whether market power is the mechanism behind higher profitability in industries with increased concentration. Temperature is another factor that can affect the rate of a reaction. Asset Utilization is defined as total sales scaled by total assets. TableVIII repeats the analysis of merger announcement returns after including private firms in the calculations of concentration. See https://www.bls.gov/mfp/mprdload.htm for a detailed discussion of these variables. Change in Concentration and the Cross-Section of Stock Returns, https://www.census.gov/econ/concentration.html, https://census.gov/foreign-trade/statistics/country/naics/index.html, http://www.census.gov/ces/dataproducts/bds/data.html, http://www.nber.org/nberces/nberces5811/nberces_5811_technical_notes.pdf, http://hobergphillips.usc.edu/industryconcen.htm, http://www.census.gov/econ/census/help/sector/data_topics/concentration_ratios.html, http://www.iatp.org/files/Consolidation_in_Food_Retailing_Prospects_for_.pdf, https://www.census.gov/programs-surveys/susb.html, https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model, Receive exclusive offers and updates from Oxford Academic. We are also grateful to Yamil Kaba for his assistance on this project. iodide ion as a catalyst, causes the decomposition Figure2 panel A reports the distribution of all changes. The effect of CensusTop4 is pronounced for NBER ROA and NBER Lerner Index but is insignificant for TFP. So we could monitor the From a theoretical perspective, mergers can create value by improving efficiency, including economies of scale and scope, synergies, and elimination of duplicate functions; mergers also create value through increasing market power. This paper documents the increase over the last 20years in the level of product market concentration across most industries in the USA. In general, increasing the concentration of a reactant in solution, increasing the surface area of a solid reactant, and increasing the temperature of the reaction system will all increase the rate of a reaction. The glow from a glow stick comes from a chemical reaction. These findings not only point to an increase in profits associated with increased concentration and markups, but further indicate that the surge in M&A deals over the past few years is in fact motivated by gains associated with increased market power. Including microcaps in our regressions does not affect our main results. CensusTop8 is the share of sales of the top eight firms (public or private) relative to the industry sales. We use ROA as a proxy for profitability because this metric is not affected by changes in capital structure nor by the presence of unusual and nonrecurring items. We find that firms in industries with the largest increases in product market concentration show higher profit margins and more profitable mergers and acquisitions deals. For example, we use the share of the top four firms reported in 1997 for the observations in years 1997, 1998, 1999, 2000, and 2001. Currently the average US firm is almost three times larger in real terms than it was 20years ago. Specifically, the median increase in HHI is 41%, while the mean increase is 90%. The dependent and control variables are constructed at the industry level and are defined in Section 6.2 and Appendix A. Winsorized at 1% and 99% of the distribution. ROA is the operating income before depreciation scaled by the book value of assets. If the concentration of a reaction species is increased (at constant T and V), the equilibrium system will shift in the direction that reduces the concentration of that species. On the other hand, TableII panel B shows a negative correlation between Asset Utilization and concentration measures over the same time period. Since concentration levels have historically been higher in capital-intensive industries, results using ROA and profit margins may be driven by variation in cost of capital and/or in capital intensity across industries. (, Aghion P., Bloom N., Blundell R., Griffith R., Howitt P. (, Asker J., Farre-Mensa J., Ljungqvist A. Overall, these results strengthen the claim that the higher profits earned by firms in increasingly concentrated industries result from markups, and not from the use of more capital or from better utilization of the given firms assets. See description of each concentration measure, Proxy for the level of product market concentration in industry. Most chemical reactions proceed faster when the concentration of one 4. decreasing the concentration of X. This evidence suggests that the higher profit margins realized by firms during this recent increase in industry concentration have been reflected in higher returns to shareholders. For example, the middle panel of TableV indicates that the coefficient of log(HHI) in the estimation of the Lerner Index is 0.093, compared with the coefficient of 0.084 in the main analysis of TableII panel C, and both coefficients are significant at a 1% level. Two groups of simulation results were integrated to fit the modified layer depth under different processes, and the . We assign the industry-level HHI to each firm, and then average across all firms in every year, thereby weighting each industry ratio by the number of public firms. Unfortunately, the information on foreign trade at a NAICS level is only available from 2000, so we limit our analysis to the period 20002013. How do you increase DNA concentration of your PCR Product? 13.3 Shifting Equilibria: Le Chtelier's Principle - OpenStax For example, let's look at Our sample consists of M&A transactions over the period 19802014 that meet the following conditions: (i) percent of ownership by acquirer prior to event is lower than 50%; (ii) percent of ownership by acquirer after event is higher than 50%; (iii) both acquirer and target are identified as public firms; (iv) acquirer and target firm have different identifiers; (v) the transaction is friendly; (vi) return data around the announcement date are available on CRSP; and (vii) the method of payment is known. Finally, we use TFP measure as the measure corresponding to asset utilization. Even after controlling for industry-level sales by foreign multinational firms in the USA, as well as for the level of import penetration, the relation between concentration measures and firm profitability remains positive and significant. We also find that over 50% of the industries in the United States have lost at least half of their peers. In fact, in the late 20th century, this premise motivated governments around the world to institute a series of policy reforms, including tariff reductions, deregulations, and aggressive antitrust enforcement, whose transformation of industrial conditions for numerous markets facilitated increased competition (e.g., Shepherd, 1982; Graham, Kaplan, and Sibley, 1983; Pryor, 1994; Nickell, 1996; Rajan and Zingales, 2001; Irvine and Pontiff, 2009). To construct annual measures of concentration, we therefore assume that the indices remain constant until the results from a new survey are available. Finally, since we do not have data on consumer prices, we cannot determine whether there is also a positive relation between concentration and consumer prices, which would substantially determine the need for antitrust intervention. Affect on Reaction Rate. You've already reacted The hydrogen peroxide is Industry is defined using a firms three-digit NAICS code. Total sales (SALE) divided by total assets (AT). Taken together, this strand of economic literature posits that intense quality competition may increase the total costs of operating in a particular industry, which, in turn, will lead to concentrated markets, as low price-cost margins reduce the number of market participants. For example, we use the share of the top four firms reported in 1997 for the observations in years 1997, 1998, 1999, 2000, and 2001. Requiring less energy to begin the reaction means more reactant molecules possess the minimum energy required and so the reaction rate speeds up by being able to process a higher reactant concentration in the same amount of time compared to the non-catalyzed reaction. Lerner Index is the operating income before depreciation minus depreciation, all scaled by total sales. Asset Utilization is defined as total sales scaled by total assets. Which of the following do you expect would increase the rate of a See Section 4 for dataset description and full specification, and Appendix A for details of variable construction. As pointed out by Lopez, Azzam, and Lirn-Espaa (2002), whether or not concentration is in the public interest depends critically on whether or not the cost-efficiency gains through concentration offset the welfare losses from greater market power. While the evidence points to firms in concentrated markets exercising market power by keeping prices over marginal costs, future research should focus on the welfare implications of our empirical findings. For robustness, we also employ a firm-weighted aggregation approach. We control for deal characteristics by including the market values and book-to-market ratios of the target and acquiring firms, and dummies for pure cash transactions and pure stock transactions. The sample covers the period 200113. We then aggregate the measure across industries by calculating a value-weighted average HHI, in which the weights are determined by the level of industry sales. To a significant extent, this concern is also mitigated by using census-based measures of concentration, which break down operations of multisegment firms into operations of component divisions sharing the same industry code. Popular answers (1) Karen A. Darbinyan Hello, you can marge two or more isolated DNA solutions and then use isopropanol precipitation and centrifugation at 10000 or you can use vacuum dryer or DNA. How can we use Le Chatelier's Principle to increase yields - Socratic For example, we find that the correlation between the percentage increase in Compustat-based HHI index and the percentage change in the ratio of sales by foreign multinational to US public firms is 0.20. Unlike many other apparent and long-standing anomalies, such as book-to-market effect, the anomaly we document here is recent and perhaps unknown to most market participants.