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Marketing Viewpoint by Ruth Winett

What Does Market Concentration Cost You?

From social media to food producers, a few large companies dominate many industries. On July 9, 2021, the Biden Administration issued an Executive Order to increase competition and reduce industry consolidation. Among the businesses cited in the executive order were agribusiness and Internet platforms. But, a small number of companies also dominate other industries, such as the insurance and especially the food industries.

For example, three or four companies have captured about 80% or more of the market for 16 popular foods. Here four of the most concentrated* food sectors:

Food No. of firms Market share
Single serve yogurt & yogurt drinks 4 97%
Carbonated soft drinks 3 93%
Dips 4 91%
Beer 4 79%

*The concentration ratio is usually the sum of the market share of 4 companies, here 3 or 4 companies.

Consolidation adversely affects smaller businesses and all of us as customers. Consolidation:

  • Reduces competition. Larger companies have the advantages of more capital, more expertise, significant buying power, and even political leverage, reducing the chance that smaller companies will succeed.
  • Increases marketing costs. Smaller companies are less able to get their message heard. How can a new insurance company compete with the advertisements of a Liberty Mutual or a GEICO? How can a small startup food company afford to pay for shelf space in grocery stores?
  • Allows for price gouging. Phone companies charge $700 and more for 5G cell phones (somewhat less with trade-ins). In fact, in 2019 market concentration cost consumers $5,000 per year, according to NYU economist Thomas Phillipson.
  • Limits customers’ choices. By bundling services, cable companies can force customers to subscribe to channels they never watch.
  • Permits food and other big companies to define the market, including product, price, place, and promotion.

In a vast country, such as the US, larger companies have an enormous advantage over smaller companies that cannot afford the financing, infrastructure, marketing, and distribution systems of a larger company. Furthermore, larger companies have more political heft and can influence legislation that favors them.

Actionable Business Insights

Copyright © 8/21 Ruth Winett. All rights reserved.

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