In economics, market concentration is a function of the number of :wikt:firm|firms and their respective shares of the total production in a market. Alternative terms are industry concentration and seller concentration. Market concentration is related to industrial concentration, which concerns the distribution of production within an industry, as opposed to a market. In industrial organization, market concentration may be used as a measure of competition, theorized to be positively related to the rate of profit in the industry, for example in the work of Joe S. Bain.
Metrics
Commonly used market concentration measures are the Herfindahl index and the concentration ratio. The Hannah-Kay index has the general form Note,, which is the exponential index.
Uses
When antitrust agencies are evaluating a potential violation of competition laws, 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 notes that: There are game theoretic models of market interaction that predict that an increase in market concentration will result in higher prices and lower consumer welfare even when collusion in the sense of cartelization is absent. Examples are Cournot oligopoly, and Bertrand oligopoly for differentiated products.
Empirical tests
studies that are designed to test the relationship between market concentration and prices are collectively known as price-concentration studies; see Weiss. Typically, any study that claims to test the relationship between price and the level of market concentration is also testing whether the market definition 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.
Alternative definition
In economics, market concentration is a criterion that can be used to rank order various distributions of :wikt:firm|firms' shares of the total production in a market.
Further examples
Section 1 of the Department of Justice 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 can be used as a market concentration criterion. Examples are stochastic dominance and Gini coefficient. Curry and George enlist the following "alternative" measures of concentration: The mean of the first moment distribution ; Hannah and Kay call this an "absolute concentration" index: The Rosenbluth index : Comprehensive concentration index : The Pareto slope. If the Pareto distribution is plotted on double logarithmic scales, the distribution function is linear, and its slope can be calculated if it is fitted to an observed size-distribution. The Linda index The U Index : 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 or the Dirac function is a good example.
