Concentration and Innovation in the U.S. Food Industries

We investigate the effect of industrial concentration on productivity growth, a proxy for innovation, in the U.S. food industries. Here, we search for a possible critical level of concentration, i.e., the inverted-U hypothesis beyond which its relationship with productivity can turn negative. Productivity growth is specified as function of growth in concentration and vice versa with conditioning variables. The resulting simultaneous panel model is estimated using a panel (grouped) database comprising of 36 food-processing industries and the 1964-1992 period. Results suggest the conditioned productivity-industrial concentration relationship has an inverted-U shape. The critical level of concentration, where the relationship between growth rates of productivity and concentration turns negative, appears to be 62.3, a 24% increase from the current levels. A mapping of the net effects of an increase in concentration suggests that current deadweight loss of $7.8 billion can be reduced to about $2.8 billion when concentration increases by 18% from its current level. A reassessment of the income distributional effects of concentration suggests that consumers gain from lower food prices and agricultural producers face an increase in demand, albeit in a second-best world.