Market Concentration

9 Key excerpts on "Market Concentration"

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  Industrial Organization

  Competition, Growth and Structural Change

  • Kenneth George, Caroline Joll, E L Lynk(Authors)
  • 2005(Publication Date)
  • Routledge

    (Publisher)

  Seller concentration refers to the size distribution of the firms that sell a specific product, i.e. how many firms are there in a market, and how big are they? The smaller the number of firms in a market, the more highly concentrated that market is. Also, if two markets contain the same number of firms, the one in which the firms are most equal in size is less concentrated. As already stated, seller concentration is the dimension of market structure which has received far and away most attention in the empirical analysis of market structure; partly because concentration is thought to play a significant role in determining business behaviour and performance, but also because data on concentration are relatively plentiful. As we shall see, however, the empirical measurement of concentration is not a simple matter.

  The theoretical link between seller concentration and business behaviour argues that in an oligopolistic market the firms are interdependent, i.e. each firm’s decision about how much to produce and how much to charge depends on how it expects its rivals to react. In turn, these expectations are influenced by the size distribution of those firms. For instance, in a market which is not growing and which contains a small number of firms each with a sizeable market share, a substantial increase in the sales of one firm will mean a noticeable loss to the others. These firms will quickly learn why they have lost sales and are likely to respond in an attempt to regain their share of the market. This train of thought may deter the firm from taking aggressive competitive action in the first place. Furthermore, the size distribution of firms influences the likelihood of collusion, whereby the firms recognise their interdependence and agree to act together to maximise joint profits. Successful collusive behaviour is more likely, other things being equal, the smaller the number of firms involved.

  The argument, then, is that the higher the level of concentration in a market, the less competitively the firms are likely to behave, with consequent effects on performance. As we shall see in Chapter 11 , this hypothesis has been subject to numerous empirical tests. It also plays an important role in monopoly and merger policy. Thus, for instance, in the UK a ‘monopoly situation’ is defined in law with reference simply to a market share criterion; a monopoly exists if one firm accounts for 25 per cent or more of the sales of a product. In the USA, also, restrictions have been placed on both horizontal and vertical mergers by reference to concentration levels. We return to these issues in Chapter 16

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  Industrial Concentration and the Chicago School of Antitrust Analysis (Volume 11.0)

  • Jan B. Rittaler(Author)
  • 2018(Publication Date)
  • Peter Lang International Academic Publishers

    (Publisher)

  826-856. 3 Cf. Bain, Joe S., Economies of Scale, Concentration, and the Condition of Entry in Twenty Manufacturing Industries, 44 AER (1954), pp. 15-39. Jan B. Rittaler - 978-3-631-75388-0 Downloaded from PubFactory at 01/11/2019 05:36:55AM via free access 211 However, within the current context, the relation between concentration and profits has undergone reinterpretation. Accordingly, concentration has to be perceived as an expression of efficiency (the actual so-called new learning) and therefore higher profits are an expression of efficiency as well. Compe-titors that have attained a large market share allegedly satisfy the wants of consumers better than smaller firms, regard less of the degree of industry concentration. Hence an increasing degree of concentration means aggressive competitive behavior primarily due to efficiency differences with prices close to long-run costs. 4 Declining concentration would be an indicator of carteli-zation or monopolistic price behavior, however, because entry of newcomers due to supracompetitive profits would be stimulated and this in turn would lead to the erosion of excess profits. 5 Newcomers would immediately erode monopoly power that is not based on efficiency. For instance, what may look like a resource monopoly in the short run is actually an expression of com-petition in the long run; therefore, such monopoly positions cannot be main-tained.e As a result, it could be concluded that profits which have not been eroded over a long time show that a firm operates efficiently in the market. In this line of reasoning, concentration is considered to be absolutely neces-sary in some markets in order to achieve economic efficiency. According to the view of this tenet, different levels of efficiency lead to an elimination of weaker competitors and thereby to concentration (efficiency causes concen-tration).

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  1 Friedman (2006). 144 Economics for Investment Decision Makers Some markets are highly concentrated, with the majority of total sales coming from a small number of firms. For example, in the market for small consumer batteries, three firms controlled 87 percent of the U.S. market as of 2005 (Duracell 43 percent, Energizer 33 percent, and Rayovac 11 percent). Other markets are very fragmented, such as automobile repairs, where small independent shops often dominate and large chains may or may not exist. New products can lead to Market Concentration: It is estimated that the Apple iPod had a world market share of over 70 percent among MP3 players in 2009. Market structure can be broken down into four distinct categories: perfect competition, monopolistic competition, oligopoly, and monopoly. We start with the most competitive environment, perfect competition. Unlike some economic concepts, perfect competition is not merely an ideal based on assumptions. Perfect competition is a reality—for example, in several commodities markets, where sellers and buyers have a strictly homogeneous product and no single producer is large enough to influence market prices. Perfect competition’s characteristics are well recognized and its long- run outcome unavoidable. Profits under the conditions of perfect competition are driven to the required rate of return paid by the entrepreneur to borrow capital from investors (so-called normal profit or rental cost of capital). This does not mean that all perfectly competitive The Importance of Market Structure Consider the evolution of television broadcasting. As the market environment for television broadcasting evolved, the market structure changed, resulting in a new set of challenges and choices. In the early days, there was only one choice: the free analogue channels that were broadcast over the airwaves. In most countries, there was only one channel, owned and run by the government.

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  Reforming the Financial Sector in Central European Countries

  • S. Poloucek(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Risk of a negative influence of concen- tration on efficiency, in their opinion, does not loom large, provided that the banking sector is open, especially when dealing with a small open economy. In this case, then, banks face competition not only from other companies in the financial sector, but also from foreign banks. The globalization process, information technologies and a deregulation process would weaken the possibilities of misusing high concentration in any industry, particularly in banking. Punt and van Rooij (1999) pro- vide evidence that there are no indications of unfavourable price-setting behaviour because of increased market power in the European banking sector. On the other hand, theory and experience demonstrate the sig- nificance of competition for efficiency, and confirm that a competitive environment requires a system that is open to competition, but not necessarily to a large number of institutions. A concentrated system can be competitive if it is contestable (that is, if competition is open). In addition, experience from many countries verifies the same fact, as attested by data from the Czech Republic, Slovakia and Poland. 3.2 The concept and measurement of concentration The quantification of concentration belongs to the most significant and at the same time debatable areas of market analysis and market structure. Economists’ attention was drawn to prices in the 1930s. 56 Reforming the Financial Sector in CEC Lerner (1934) suggested that to express a deviation from the competitive ideal, the difference between price and marginal cost divided by price ([P MC]/P) may be used. A disadvantage of this approach lies in the fact that this is essentially only a subsequent (ex post) measure of alloca- tive inefficiency of an industry. It may also be influenced by factors other than the monopoly power of some firms. Moreover, it is rather hard to obtain necessary information on cost factors (Feinberg, 1980).

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  Strategic Management

  • Garth Saloner, Andrea Shepard, Joel Podolny(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  COMPETITION IN CONCENTRATED MARKETS 8.1 INTRODUCTION Most well-known firms are major players in their industries. The pharmaceutical, automobile, semiconductor, airline, telecommunication, investment banking, bulk chemical, and petroleum industries are but a handful of the industries whose incum- bent firms include important, identifiable players. These firms are large enough to affect industry pricing and, more generally, to determine the competitive characteris- tics of their industries. When Ford changes its prices for automobiles, its decision affects the demand for the cars of every automobile firm selling in Ford’s major mar- kets, and all firms will respond. When Northern Telecom introduces a new generation of phone switching equipment in the United States, all firms selling switching equip- ment in the United States must either respond or lose business. In contrast, The Gap, despite its prominence in one segment of the retail clothing industry (see Chapter 7), has a small share of all clothing sales, and thousands of clothing retailers are largely unaffected by the decisions it makes. Industries containing firms with substantial market share are called concentrated industries because market share is concentrated in the hands of a few firms. In the spec- trum of competition defined in Chapter 6, these industries occupy the space between niche and monopoly markets. Although the terminology distinguishes among these industries according to how market share is distributed in them, what is important from a managerial perspective is how the major players in these industries can affect industry outcomes. A manager at a leading firm in a concentrated industry knows that her decisions about price or product characteristics will affect all the other players in the industry. If one leading firm competes aggressively, competition will intensify for all firms in the industry.

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  The Great Reversal

  How America Gave Up on Free Markets

  • Thomas Philippon(Author)
  • 2019(Publication Date)
  • Belknap Press

    (Publisher)

  . 45 . chapter 3 The Rise in Market Power In 1998 Joel Klein, who ran the antitrust operation at the US Depart-ment of Justice, declared in a January 29 address before the New York State Bar Association that “our economy is more competitive today than it has been in a long, long time.” That statement was true, but unfortu-nately for US households, it was not prescient. This is not a critique of Klein. He could not have foreseen the evolution of US markets. And the history of economics is replete with more embarrassing predictions. The well-known Yale economist Irving Fisher gave a speech at the monthly dinner of the American Purchasing Agents Association where he argued that “stock prices have reached what looks like a permanently high pla-teau.” As a general statement about stock prices, it is rather silly. The more unfortunate point, however, is that he made that claim on October 15, 1929.* In Chapter 2, we described various ways to measure competition. We understand their meaning, usefulness, and limitations. Let’s put them to work. Concentration of Market Shares It is natural to start with concentration. There are two basic measures of concentration: one is the market share of the top firms, either of a single firm (concentration ratio CR1) or of the top five or top eight firms in the industry (CR5 or CR8); the other is the Herfindahl-Hirschman index (HHI) that we dicussed in Chapter 2. Using both measures, we are going to show that concentration has increased in most US industries. * The account of the dinner discussion published in the New York Times on October 16, 1929, is well worth reading. 46 . The Rise of Market Power in the United States The US Census Bureau provides estimates of revenue concentration by industry.

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  The Economics of Banking

  • Kent Matthews, John Thompson(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  Finally, it examines the state of competition in the UK banking market. 11.2 CONCENTRATION IN BANKING MARKETS How is market power measured? Does it have any relation to the number of banks in the market? We examine these questions in the context of the rising trend towards consolidation in banking markets globally. Many antitrust regulators across a number of countries define market power in terms of the concentration in the market. The importance of Market Concentration has its justification in the so-called structure–conduct–performance paradigm of Bain (1951). In a nutshell, the SCP hypothesis is that fewer and larger firms (high concentration) are more likely to engage in anticompetitive behaviour. The most common measure of concentration and the one used by financial regulators is the Herfindahl–Hirschman Index (HHI ), which is defined as the sum of the squared market shares of the banks in the market. Box 11.1 explains how the index is calculated. The upper bound for the index is 10 000, which indicates a monopoly, and the lower bound is zero in the case of an infinite number of banks (perfect competition). The US Department of Justice considers a market with a result of less than 1000 to be a competitive marketplace, a result of 1000–1800 to be a moderately concentrated marketplace and a result of 1800 or greater to be BOX 11.1 Calculation of the HHI The formula for the HHI is given by HHI  X n i1 s 2 i where s is the market share of the ith bank Consider a market that has five banks, with the market share for deposits (it could equally be loans) as follows: Bank Deposit share (%) 1 30 2 25 3 20 4 16 5 9 The HHI  30 2  25 2  20 2  16 2  9 2  2262. Suppose that banks 3 and 5 merge. The HHI after the merger is 2622. Because the banking market is already concentrated and ΔHHI  360, this merger may be rejected by the regulatory authorities.

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  Darwinian Fitness in the Global Marketplace

  Analysing the Competition

  • P. Rajagopal(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Following these rules strictly the high performing companies narrow the strategy-to-performance gap and achieve sustainable growth among the competitors. 3 The least competitive market is a monopoly, dominated by a single firm that can earn substantial excess profit by controlling either the amount of out- put in the market or the price but not both. In this sense it is a price setter. When there are few firms in a market (oligopoly), they have the opportunity to behave as a cartel. A cartel may be described as an agreement among two or more firms in the same industry to cooperate in fixing prices and/or carv- ing up the market and restricting the volume of production they handle. A market dominated by a single firm does not necessarily have monopoly power if it is a contestable market. Monopolistic competition in the marketplace holds the control of a single firm over its products and influences the market price of its product by alter- ing the rate of production. Monopolistic firms engage with such products that are not perfect substitutes or are at least perceived to be different to all other brands products. Unlike in perfect competition, the monopolistic firm does not produce at the lowest-possible average total cost. Instead, the firm produces at an inefficient output level, reaping more in additional revenue than it incurs in additional cost versus the efficient output level. Such firms produce identical products except for branding, but due to a relatively low number of firms, which control the vast amount of the product, can con- trol the price to an extent by decreasing supply slightly. Contrary to the Understanding Market Competition 39 monopolistic firms in the market, there exists perfect competition. Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influ- ence prices.

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  Markets for Managers

  A Managerial Economics Primer

  • Anthony J. Evans(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  This is especially true when it comes to competition theory. Even those who disparage and discount the advice of economists rely almost entirely on economic theories to make their arguments. Understanding the basis for regulation, and the role that collusion and monopolies play in a market economy, is a crucial part of the competitive landscape.

  5.1 Market Concentration

  Think of an archetypal market – a place where buyers and sellers meet to trade. It's probably noisy, chaotic and exciting. In the hustle and bustle of a Moroccan souk it's impossible to pass by a stall without entering into a frenzied negotiation. In some ways this embodies what economists have in mind when they talk about ‘perfect competition’. Textbook models will make several assumptions, which come close to holding in places like Agadir. For example:

  • A homogenous commodity (i.e. no product differentiation)
  • A large number of relatively small buyers and sellers
  • Free entry and exit into and out of the market
  • Perfect information
  • Perfect factor mobility
  • Zero transaction costs.

  These assumptions are important, because they generate some important implications. If the above assumptions hold, we can say that the market will exhibit two forms of efficiency:

  1. Allocative efficiency
     If goods are homogenous then there will be a wide availability of substitutes. This will bid down the market-clearing price until price (P) equals marginal cost (MC). This implies that the value that consumers place on the good is equal to the cost of the resources used to produce it. In other words, resources are allocated such that the best value comes from their use.
  2. Productive efficiency
     Free entry means that if firms are making profit (AR>AC) there will be new entrants, which raises AC for all firms, and competes away the profit. Similarly any losses (AR<AC) will result in firms leaving the industry, reducing AC.3 In equilibrium firms make zero profit (AR=AC) and will end up producing at the minimum of the average cost curve. This occurs when goods are made at lowest possible cost. This puts the economy on the outer limit of what is known as the ‘production possibility frontier’

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