Concentration Flashcards
(22 cards)
What does the spectrum of market structures not always tell us?
Will only describe in accurate detail a actual market environment, it only highlights the extreme possibilities.
It aids us in understanding the extent and effect of competition in real world markets and what happens when we remove the assumption from the extreme models.
What is tacit collusion?
how firms operate with firms in the real world marker without forming cartels/collusion.
What is a dominant firm price leadership?
When one firm controls the vast majority of the market share, in its industry. Within the industry, there are other, smaller firms that provide the same products or services as the leading firm.
What is a barometric firm price leadership?
one firm is a leadership that others follows, the firm is more adapt than others at identifying shifts in market forces.
What is concentration?
a way of assessing the degree of competition in an industry is to calculate its market concentration.
Concentration is the degree to which an industry is dominated by large businesses (close to monopoly)
What details does concentration give us?
the details of markets and firms can judge the insights of the expected competition they are likely to face which can be fed back into the 5 forces framework.
What does lower concentration imply?
More firms operate in the market and hence one would expect to find that more competition exists
What are the two measures of concentration?
- Concentration ratios
- Herfindahl- Hirschman Index
What are concentration ratios?
this is the % of the value of total sales accounted for by the (n) largest firms in the industry. Range is between 0 and 100%, higher measures equate to a higher market concentration and thus less competition as such in a monopoly
There are a variety of different concentration ratios for different numbers of firms (i.e. n) e.g. C4 or C5, must select appropriate measures for tasks at hand, it tells us what proportion of the market the biggest firm controls.
Example of concentration ratios
industry with market share distributed as: 50%, 13%, 12%,5%,4%,4%,4%,4% and 4%
C4 = 50% + 13% +12%+5% = 80%
80% is highly oligopolistic but Cn doesn’t take account of the size distribution of firms. In this case there is one dominant firm that has half of the market but that isn’t conveyed with our measure of concentration
C3 (75%) would be a bit less bad in this regard.
What are concentration thought of as?
as being simple and easy to use but it suffers because important information is not conveyed.
What is the Herfindahl- Hirshman index?
a different approach to measure market concentration that take account of all firms in this industry. It is the sum of the squared market share of each firm (Xi)
What do different HH values mean?
HH usually takes a value between 0 and 10,000.
- 0 = perfect competition
- 0-100 - monopolistic competition
- 2500 = tight oligopoly
- 5000= duopoly (2 firms)
-10,000 = monopoly
Example of HH index
25%,20%,18%,17%,10%,5%,3%,2%
HH = 25^2 + 20^2 + 18^2 + 17^2 +10^2 +5^2 +3^2 + 2^2 = 1776 - fairly oligopolistic industry.
What does a higher HH index indicate?
less competition, we are making use of more information than Cn and hence get more detail on market concentration and thus competition.
Is concentration perfect?
it is not a perfect measure of competition. Markets with the same number of firms involved might experience competition om different ways and to varying degrees
What is the extent and form of (aggressive) competition?
in Bertrand firm should avoid price competition concentration as it doesn’t tell us if a firm has multiple products and these may compete against each other
What is the extent of any collusive behaviour?
may be some cooperation between firms, but you cannot get the extent of this behaviour from concentration.
What is the geographical scope of the market?
if there is only national level pictures of a market then there is no way for consumers to know the concentration of their local market that is essentially the most important to them.
A firm may have a 50% of the market, but only operate in the North, which is not near the consumers.
What is the extent of barriers to entry?
firms would be worried about competition if there are low barriers to entry e.g. may be more competitive today but less tomorrow because of the potential competition firms face and thus they will want to be protecting themselves.
What is the market and industry correspondence?
Fail to recognise that firms often produce multiple products, figures aren’t how we perceive the smaller market.
Is concentration useful?
is a useful insight, there are several ways of working it out, it gives us details of markets and firms can judge the insights of the expected competition they are likely to face - this can be fed back into the 5 forces framework but needs to be considered appropriately.
