The holy grail of capitalism

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Competition between companies is seen by most economists as the engine of innovation, economic growth, and prosperity in modern market economies. Competition is one of the only economic forces to have laws and dedicated regulators set up to promote it, and nearly everyone agrees that some interventions to promote it are worthwhile. But while virtually everyone agrees that competition is a very good thing, it is much harder to agree on what competition actually looks like.

Instead, economists, courts, and regulators rely on imperfect proxies for competition. But these are often contradictory. They can even lead to perverse outcomes that few people think desirable: legal challenges, prohibitions on business practices that would actually increase innovation or growth, and bans on mergers that, paradoxically, can leave markets less competitive.

A reliable and usable measure of competition that actually matched up with other measures of whether a market is healthy or not is something of a holy grail in economics.

Imperfect proxies for competition

Traditional accounts of competition use proxy measures like market concentration, which looks at how much market share the biggest companies have.

A country that had only two grocery store chains, each of which had 50 percent of the market, would be said to be highly concentrated compared to a country that had a thousand stores, each of which earned 0.1 percent of shoppers’ grocery spending. This may seem intuitive enough, but it can be misleading.

For one thing, looking at concentration at a national level can obscure what’s going on at the local level. Nationwide, concentration in America’s retail sector has been rising since the early 1990s as chains like Walmart, Kroger and Target have opened more branches across the country. Concentration as it’s usually measured more than tripled between 1992 and 2012. But retail concentration at local levels increased by only about a third over the same period. The growth of nationwide chains meant new stores opening up in areas that only used to have a handful of smaller local stores, exposing them to new and often intense competition to cut their prices and improve their offerings.

Even when concentration does rise, it’s not always bad for competition. Bigger companies can benefit from economies of