Market concentration
Encyclopedia
In economics
, market concentration is a function
of the number of firms and their respective shares
of the total production
(alternatively, total capacity or total reserves) in a market
. Alternative terms are Industry concentration and Seller concentration.
Market concentration is related to the concept of industrial concentration, which concerns the distribution of production within an industry
, as opposed to a market.
(HHI or simply H) and the concentration ratio
(CR). The Hannah-Kay (1971) index has the general form
.
Note,
, which is the exponential index.
agencies are evaluating a potential violation of competition law
s, they will typically make a determination of the relevant market and attempt to measure market concentration within the relevant market.
There are game theoretic
models of market interaction (e.g. among oligopolists
) that predict that an increase in market concentration will result in higher prices and lower consumer welfare
even when collusion
in the sense of cartel
ization (i.e. explicit collusion) is absent. Examples are Cournot oligopoly
, and Bertrand oligopoly for differentiated product
s.
studies that are designed to test the relationship between market concentration and prices are collectively known as price-concentration studies; see Weiss (1989).
Typically, any study that claims to test the relationship between price and the level of market concentration is also (jointly, that is, simultaneously) testing whether the market definition (according to which market concentration is being calculated) is relevant; that is, whether the boundaries of each market is not being determined either too narrowly or too broadly so as to make the defined "market" meaningless from the point of the competitive interactions of the firms that it includes (or is made of).
, market concentration is a criterion that can be used to rank order
various distributions of firms' shares of the total production (alternatively, total capacity or total reserves) in a market
.
and the Federal Trade Commission
's Horizontal Merger Guidelines is entitled "Market Definition, Measurement and Concentration." Herfindahl index
is the measure of concentration that these Guidelines state that will be used.
A simple measure of market concentration is 1/N where N is the number of firms in the market. This measure of concentration ignores the dispersion among the firms' shares. It is decreasing in the number of firms and nonincreasing in the degree of symmetry between them. This measure is practically useful only if a sample of firms' market shares is believed to be random, rather than determined by the firms' inherent characteristics.
Any criterion that can be used to compare or rank
distributions (e.g. probability distribution
, frequency distribution
or size distribution) can be used as a market concentration criterion. Examples are stochastic dominance
and Gini coefficient
.
Curry and George (1981) enlist the following "alternative" measures of concentration:
(a) The mean of the first moment
distribution
(Niehans, 1958); Hannah and Kay (1977) call this an "absolute concentration" index:
(b) The Rosenbluth (1961) index (also Hall and Tideman, 1967):
where symbol i indicates the firm's rank position
.
(c) Comprehensive concentration index (Horvath 1970):
where s1 is the share of the largest firm. The index is similar to 
except that greater weight is assigned to the share of the largest firm.
(d) The Pareto slope (Ijiri and Simon, 1971). If the Pareto distribution is plotted on double logarithmic scales, [then] the distribution function is linear, and its slope can be calculated if it is fitted to an observed size-distribution.
(e) The Linda index (1976)
where Qi is the ratio between the average share of the first 
firms and the average share of the remaining 
firms. This index is designed to measure the degree of inequality between values of the size variable accounted for by various sub-samples of firms. It is also intended to define the boundary between the oligopolists
within an industry and other firms. It has been used by the European Union
.
(f) The U Index (Davies, 1980):
where 
is an accepted measure of inequality (in practice the coefficient of variation is suggested), 
is a constant or a parameter (to be estimated empirically) and N is the number of firms. Davies (1979) suggests that a concentration index should in general depend on both N and the inequality of firms' shares.
The "number of effective competitors" is the inverse of the Herfindahl index.
Terrence Kavyu Muthoka defines distribution just as functionals in the Swartz space which is the space of functions with compact support and with all derivatives existing.The Media:Dirac Distribution or the Dirac function is a good example .
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, market concentration is a function
Function (mathematics)
In mathematics, a function associates one quantity, the argument of the function, also known as the input, with another quantity, the value of the function, also known as the output. A function assigns exactly one output to each input. The argument and the value may be real numbers, but they can...
of the number of firms and their respective shares
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
of the total production
Production, costs, and pricing
The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
(alternatively, total capacity or total reserves) in a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
. Alternative terms are Industry concentration and Seller concentration.
Market concentration is related to the concept of industrial concentration, which concerns the distribution of production within an industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
, as opposed to a market.
Metrics
Commonly used market concentration measures are the Herfindahl indexHerfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
(HHI or simply H) and the concentration ratio
Concentration ratio
In economics, a concentration ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR4 and the CR8, which means the four and the eight largest firms...
(CR). The Hannah-Kay (1971) index has the general form
.Note,
, which is the exponential index.Uses
When antitrustAntitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...
agencies are evaluating a potential violation of competition law
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
s, they will typically make a determination of the relevant market and attempt to measure market concentration within the relevant market.
Motivation
As an economic tool market concentration is useful because it reflects the degree of competition in the market. Tirole (1988, p. 247) notes that:- Bain's (1956) original concern with market concentration was based on an intuitive relationship between high concentration and collusion.
There are game theoretic
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...
models of market interaction (e.g. among oligopolists
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
) that predict that an increase in market concentration will result in higher prices and lower consumer welfare
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
even when collusion
Collusion
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage...
in the sense of cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...
ization (i.e. explicit collusion) is absent. Examples are Cournot oligopoly
Cournot competition
Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. It is named after Antoine Augustin Cournot who was inspired by observing...
, and Bertrand oligopoly for differentiated product
Differentiated Bertrand competition
As a solution to the Bertrand paradox in economics, it has been suggested that each firm produces a somewhat differentiated product, and consequently faces a demand curve that is downward-sloping for all levels of the firm's price....
s.
Empirical tests
EmpiricalEmpirical
The word empirical denotes information gained by means of observation or experimentation. Empirical data are data produced by an experiment or observation....
studies that are designed to test the relationship between market concentration and prices are collectively known as price-concentration studies; see Weiss (1989).
Typically, any study that claims to test the relationship between price and the level of market concentration is also (jointly, that is, simultaneously) testing whether the market definition (according to which market concentration is being calculated) is relevant; that is, whether the boundaries of each market is not being determined either too narrowly or too broadly so as to make the defined "market" meaningless from the point of the competitive interactions of the firms that it includes (or is made of).
Alternative definition
In economicsEconomics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, market concentration is a criterion that can be used to rank order
Ranking
A ranking is a relationship between a set of items such that, for any two items, the first is either 'ranked higher than', 'ranked lower than' or 'ranked equal to' the second....
various distributions of firms' shares of the total production (alternatively, total capacity or total reserves) in a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
.
Further Examples
Section 1 of the Department of JusticeUnited States Department of Justice
The United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
and the Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
's Horizontal Merger Guidelines is entitled "Market Definition, Measurement and Concentration." Herfindahl index
Herfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
is the measure of concentration that these Guidelines state that will be used.
A simple measure of market concentration is 1/N where N is the number of firms in the market. This measure of concentration ignores the dispersion among the firms' shares. It is decreasing in the number of firms and nonincreasing in the degree of symmetry between them. This measure is practically useful only if a sample of firms' market shares is believed to be random, rather than determined by the firms' inherent characteristics.
Any criterion that can be used to compare or rank
Ranking
A ranking is a relationship between a set of items such that, for any two items, the first is either 'ranked higher than', 'ranked lower than' or 'ranked equal to' the second....
distributions (e.g. probability distribution
Probability distribution
In probability theory, a probability mass, probability density, or probability distribution is a function that describes the probability of a random variable taking certain values....
, frequency distribution
Frequency distribution
In statistics, a frequency distribution is an arrangement of the values that one or more variables take in a sample. Each entry in the table contains the frequency or count of the occurrences of values within a particular group or interval, and in this way, the table summarizes the distribution of...
or size distribution) can be used as a market concentration criterion. Examples are stochastic dominance
Stochastic dominance
Stochastic dominance is a form of stochastic ordering. The term is used in decision theory and decision analysis to refer to situations where one gamble can be ranked as superior to another gamble. It is based on preferences regarding outcomes...
and Gini coefficient
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....
.
Curry and George (1981) enlist the following "alternative" measures of concentration:
(a) The mean of the first moment
Moment (mathematics)
In mathematics, a moment is, loosely speaking, a quantitative measure of the shape of a set of points. The "second moment", for example, is widely used and measures the "width" of a set of points in one dimension or in higher dimensions measures the shape of a cloud of points as it could be fit by...
distribution
Probability distribution
In probability theory, a probability mass, probability density, or probability distribution is a function that describes the probability of a random variable taking certain values....
(Niehans, 1958); Hannah and Kay (1977) call this an "absolute concentration" index:
(b) The Rosenbluth (1961) index (also Hall and Tideman, 1967):
where symbol i indicates the firm's rank positionRanking
A ranking is a relationship between a set of items such that, for any two items, the first is either 'ranked higher than', 'ranked lower than' or 'ranked equal to' the second....
.
(c) Comprehensive concentration index (Horvath 1970):
where s1 is the share of the largest firm. The index is similar to except that greater weight is assigned to the share of the largest firm.(d) The Pareto slope (Ijiri and Simon, 1971). If the Pareto distribution is plotted on double logarithmic scales, [then] the distribution function is linear, and its slope can be calculated if it is fitted to an observed size-distribution.
(e) The Linda index (1976)
where Qi is the ratio between the average share of the first firms and the average share of the remaining firms. This index is designed to measure the degree of inequality between values of the size variable accounted for by various sub-samples of firms. It is also intended to define the boundary between the oligopolistsOligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
within an industry and other firms. It has been used by the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
.
(f) The U Index (Davies, 1980):
where is an accepted measure of inequality (in practice the coefficient of variation is suggested), is a constant or a parameter (to be estimated empirically) and N is the number of firms. Davies (1979) suggests that a concentration index should in general depend on both N and the inequality of firms' shares.The "number of effective competitors" is the inverse of the Herfindahl index.
Terrence Kavyu Muthoka defines distribution just as functionals in the Swartz space which is the space of functions with compact support and with all derivatives existing.The Media:Dirac Distribution or the Dirac function is a good example .
See also
- Concentration ratioConcentration ratioIn economics, a concentration ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR4 and the CR8, which means the four and the eight largest firms...
- Dominance (economics)Dominance (economics)Market dominance is a measure of the strength of a brand, product, service, or firm, relative to competitive offerings. There is often a geographic element to the competitive landscape...
- Gini coefficientGini coefficientThe Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....
- Herfindahl indexHerfindahl indexThe Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
- Horizontal Merger Guidelines
- Lorenz curveLorenz curveIn economics, the Lorenz curve is a graphical representation of the cumulative distribution function of the empirical probability distribution of wealth; it is a graph showing the proportion of the distribution assumed by the bottom y% of the values...
- MonopolyMonopolyA monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
- Probability distributionProbability distributionIn probability theory, a probability mass, probability density, or probability distribution is a function that describes the probability of a random variable taking certain values....
- Stochastic dominanceStochastic dominanceStochastic dominance is a form of stochastic ordering. The term is used in decision theory and decision analysis to refer to situations where one gamble can be ranked as superior to another gamble. It is based on preferences regarding outcomes...