Variety, scale, and industry concentration

Both Derek Thompson and Noah Smith have highlighted the beer industry recently, to explore the topic of industry concentration. Both pieces are worth a read, and I want to just make a couple points.

One, as Thompson notes up front, it’s notable that beer is an example of rising industry concentration; a few firms control the bulk of the industry. And yet craft breweries are also increasing their market share.

For all the attention paid to concentration ratios, oligopoly, and market power, it’s equally important to think about entry costs. And this side of the ledger seems complicated. New business starts are down relative to the economy, but growth entrepreneurship may be up. There’s some evidence that rising startup costs are holding entrepreneurs back, but also evidence that cloud computing advantages new firms.

To my mind, we still can’t quite answer the question: Is it easier or harder than it used to be to start a business? Technology probably makes it cheaper in some ways, at least to get up and running. But it might make it more expensive to become a real competitor, to the extent that scale is rewarded. And then regulation may make it more costly in certain cases, along the lines suggested by Brink Lindsey and Steven Teles in The Captured Economy.

But whatever the answer is in aggregate, the beer story raises the possibility that in some industries things may be going well for the biggest firms and well for the smallest or newest ones. That’s a possibility that ought to get more attention in the industry concentration / monopoly conversation in general. And it makes me think of Matthew Hindman’s characterization of the internet’s effect on the media industry, from his 2009 book The Myth of Digital Democracy. In it, he refers to the “missing middle”:

On the one hand, the news market in cyberspace seems even more concentrated on the top ten or twenty outlets than print media is.  On the other, the tiniest outlets have indeed earned a substantial portion of the total eyeballs…. It is the middle-class outlets that have seen relative decline in the online world.

We ought to think more about “missing middles” when thinking about industry dynamics, market power, etc. It seems, based on Thompson’s and Smith’s pieces, to be a decent explanation of the beer industry.

One last point, sort of unrelated… I was re-reading parts of Information Rules last weekend, Hal Varian and Carl Shapiro’s classic on digital economics and strategy. And it included a little two-by-two that seemed relevant to the beer example, and more broadly to questions of technology and industry concentration:

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Both Thompson and Smith, in their consideration of beer, explore the dimensions of variety and scale. As we seek to understand where the craft beer story can be repeated, this 2×2 is worth bearing in mind.