market concentration models

Market Concentration

Outline the main measures of industrial concentration and discuss their relative merits in summarising the features of the numbers and size distribution of firms likely to be associated with market power, explaining which you think is the best measure.

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Hall & Tideman

Unambiguous results

Independent of the size of industry

Scale 0-1

Principle of transfers

Proportional increases/decreasesDecreasing function of number of firms

Four Firm Concentration Ratio

Highly Concentrated

Highly Competitive

Medium

0-50%

50-80%

80-100%

Four Firm Concentration Ratio

30%

18%

17%

12%

77%

Market Share

4 Firm Concentration Ratio

Source: Kantar World Panel. March 2012

Four Firm Concentration

‣Easy to calculate‣Requires little data‣Simple to understand

Positives Negatives‣Ambiguous‣Ignores other firm’s market share‣Does not Satisfy all of Hall & Tideman’s factors

Herfindhal Hirshman

34%19%15%10%5%5%5%4%2%1%

= 1938

Market Share HHI

34²+19²+15²+10²+5²+5²+5²+4²+2²+1 ²

Highly Concentrated

Highly Competitive

Medium

1000-1800

1800-2500

2500+

HHI

‣Satisfies all of Hall & Tideman’s properties‣Result changes as market share changes or each firm

Positives Negatives

‣Ambiguous- what does 1938 mean?‣Needs complete data

Problems with both 4 firm ratio and HHI

Figure 1: Using the HHI method. Figure 2: Using the four firm concentration ratio method.

Problems with both 4 firm ratio and HHI

•Conflicting information•Impact of foreign companies•Do not take into account regional distributions of firms•Accuracy of data