Scribd
Upload
13 views

Unit 2 Part 1

it is about SCP paradigm in industrial economics.

Uploaded by

AYUSH KUMAR
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
13 views

Unit 2 Part 1

it is about SCP paradigm in industrial economics.

Uploaded by

AYUSH KUMAR
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 17

Unit 2: Market Concentration

Nature and • Measurement Criteria


Measurement • Concentration Indices
of Market • Inequality Measures
Concentration

• Deterministic
Theories of Approach
Concentration • Stochastic Approach
Nature and Measurement of Market Concentration

1. Market Concentration: Refers to the degree to which production for a particular market or
industry is concentrated in the hands of a few large firms. So Market is said to be
concentrated if:
a. Fewer number of firms in production.
b. Unequal distribution of market share.

2. Market Concentration Vs. Aggregate Concentration:


a. Aggregate concentration related with the degree to which a few large firms control the
production of the economy as a whole or at least the broad sector of the economy such
as financial sector of the manufacturing sector.
b. Aggregate Concentration have important consequences for the distribution of the
political, social and economic power in the democratic society.

3. Buyer Concentration Vs Seller Concentration:


As there are intermediate products being sold, also consumer goods are sold by
manufacturers to wholesalers and distributers. Thus, the relative size and buyer
concentration is also important but we restrict to the seller concentration for this course.
4. Absolute Concentration and Inequality Measures:
a. Absolute Concentration related to both dimensions of market
concentration– Firm numbers and Relative market shares.
b. Inequality Measures related to the market shares only. It is adapted
from the standard statistical theory and measure of dispersion.
1. Concentration Curve:
---A, B and C are three hypothetical industries.
---Curves are concave from below, cumulated from largest to smallest
-- - If straight line, then all the firms in the industry are of equal size
--- The firm size concavity is reflected in the concavity of the curves
--Concentration is higher in the industry whose concentration curves lie everywhere above
the other industry.
2. Hannah and Kay (1997): Criteria intrinsic to the notion of
market concentration
1. Concentration curve Ranking Criteria: Higher the concentration ratio, more
concentrated the industry than other

2. Sales transfer Principle: Transfer of sale from a small to large firm increased
the measured concentration and will cause the concentration curve to bulge
upwards. (Shown by the dashed line)

3. Entry Condition: Addition of a small firm to the industry, relative share of the
existing firm unchanged will lead to decease in the market concentration.

4. Exit Condition: Market Concentration will increase.

5. Merger Condition: Merger of two or more firms increases the market


concentration.
Concentration Indices
Concentration Index/Indices is the summary representation of a concentration
curve. For the following indices:
1. An industry with ‘n’ firms.
2. Output : xi ( i=1, 2, ….., n) (Ranked from Largest to smallest)
3. Industry output

4. Market share of i th firm= Si= xi/x


1. Reciprocal Method= 1/n
• Merit : Simplest Index
• Merit: Theoretically appropriate when firms are assumed to be of equal size i.e under
symmetric models
• Demerit: Limited Practical Use
2. Hrischman- Herfindahl Index

3. Hannah and Kay Indices


• Similar to H index, but varying in the weight they give to large firms
• Elasticity parameter is taken arbitrarily.
• Merit: Flexibility into the measurement of concentration i.e greater weight to be
attached to larger firms by increasing the value of elasticity.
4. Con
4. Concentration Ratio

• Most widely used index


• Defined as the proportion of industry output accounted for by the ‘r’ largest firms, r is
arbitrary number.
• Example: 5 firms= 0.15, 0.12, 0.13, 0.06, 0.04, 0.03. So, 5 firms concentration is 40%.

• Merits: Descriptive empirical work


Easy to Calculate
Easy to understand
Applicable to oligopolistic pricing problems

• Demerits: Arbitrary selection of r


When concentration curve intersect, the measure will give different rankings
of industry by concentration for different values of r
Inequality Measures
1. Lorenz Curve:
--Ignore the firm numbers
-- Firms from smallest to largest (unlike Concentration curve)
-- OT represents when firms are of equal size
-- More the inequality, more farther the Lorenz Curve from the diagonal
--Lorenz Curve concave to the diagonal from below, reflecting cumulating from the
smallest firm.
2. Ginni Coefficient :
--Direct representation in terms of Lorenz diagram
-- Ratio of shaded area to the area of the triangle OST
--0 < G < 1 (where 0 represents perfect equality)
--The greater the inequality in the firm size, the greater the shaded area and
the larger the Ginni Coefficient

3. Coefficient of Variation:
--Ratio of standard deviation of the firm size to the mean size
-- CV = (SD/ Mean) * 100.
--Unit free measure of dispersion and hence of the firm size inequality

4. Variance of the logarithms of the firm size:


--Applicable when distribution of firms by size is lognormal i.e logarithms of the
firm size are normally distributed.
--This measure gives an unambiguous ranking of the firm size inequality.
Nature and Measurement of Market
Concentration
Measurement Concentration Inequality
Criteria Indices Measures
• Concentration • Reciprocal Index
Curve • Hrischman- • Lorenz Curve
• Hannah and Kay Herfindahl Index • Ginni Coefficient
• Hannah and Kay • Coefficient of
Indices Variation
• Concentration • Variance of the
Ratio logarithms of
the firm size

You might also like