3 Concentration Ratios
Hand-out 3: Market Concentration
Specification
Market concentration.
Definition
“’Market concentration’ is the degree to which the output of an industry is dominated by its largest producers.”
In other words, how many of the sales in the market are accounted for by the biggest firms in that market.
Firm
Sales (£m)
% Market Share
A
56
B
43
C
22
D
12
E
3
F
1
Total
100%
Calculate the 3 firm concentration ratio of this market.
3 firm concentration ratio = __________________________________________________________
This means:
A highly concentrated market is a market which is dominated by a small number of firms (oligopoly)
We say a market becomes more highly concentrated as fewer firms dominate a larger share of the market
The Impact of Increased Concentration
You need to be familiar with impact of increased market concentration on a market, and that this can be caused by mergers and acquisitions between companies.
Benefits of increased concentration:
Firms gain from economies of scale
The natural monopoly argument
Dynamic efficiency gains
Use of supernormal profits for efficiency gains
Use of supernormal profits to innovate
Drawbacks of increased concentration:
Lack of competition between firms
Firms may be productively and allocatively inefficient
Higher prices and reduced output
Less incentive to innovate
Evaluation of Increased Market Concentration
The impact of increased concentration may depend upon the extent to which transport markets are regulated.
The impact may depend upon the extent to which existing dominant firms fear entry by other firms (ie degree of contestability)
The impact may depend upon exactly how many firms there are in the market. For example, despite a rise in concentration, if there are still a number of firms fiercely competing against each other, then a more competitive market structure may exist in reality.
Past Paper Questions
Topic
Questions
Market concentration.
Discuss the effects of increased concentration in
Specification
Market concentration.
Definition
“’Market concentration’ is the degree to which the output of an industry is dominated by its largest producers.”
In other words, how many of the sales in the market are accounted for by the biggest firms in that market.
Firm
Sales (£m)
% Market Share
A
56
B
43
C
22
D
12
E
3
F
1
Total
100%
Calculate the 3 firm concentration ratio of this market.
3 firm concentration ratio = __________________________________________________________
This means:
A highly concentrated market is a market which is dominated by a small number of firms (oligopoly)
We say a market becomes more highly concentrated as fewer firms dominate a larger share of the market
The Impact of Increased Concentration
You need to be familiar with impact of increased market concentration on a market, and that this can be caused by mergers and acquisitions between companies.
Benefits of increased concentration:
Firms gain from economies of scale
The natural monopoly argument
Dynamic efficiency gains
Use of supernormal profits for efficiency gains
Use of supernormal profits to innovate
Drawbacks of increased concentration:
Lack of competition between firms
Firms may be productively and allocatively inefficient
Higher prices and reduced output
Less incentive to innovate
Evaluation of Increased Market Concentration
The impact of increased concentration may depend upon the extent to which transport markets are regulated.
The impact may depend upon the extent to which existing dominant firms fear entry by other firms (ie degree of contestability)
The impact may depend upon exactly how many firms there are in the market. For example, despite a rise in concentration, if there are still a number of firms fiercely competing against each other, then a more competitive market structure may exist in reality.
Past Paper Questions
Topic
Questions
Market concentration.
Discuss the effects of increased concentration in