WhatdowemeanbyMarketConcentration?

Topic4.1.5.2

KeyConcepts– MarketStructures

MonopolisticCompetition

Amarketstructurecharacterizedbymanybuyersandsellersofslightlydifferentproductsandeasyentryto,andexitfrom,theindustry.

Monopsony Whenasinglebuyercontrolsthemarketforaparticulargoodorservice

OligopolyAnoligopolyisamarketdominatedbyafewproducers,eachofwhichhascontroloverthemarket.

PerfectcompetitionTheoreticalconditionofamarketwherepricesreflectcompletemobilityofresourcesandfreedomofentryandexit

WhatisMarketConcentration?• Marketshareinsimpletermsistheproportionofthesalesrelativetootherfirms• Theconcentrationratiomeasuresthecombinedmarketshareofthetop‘n’firmsintheindustry.• Sharecanbebysales,employmentoranyotherrelevantindicator.• Thevalueof‘n’isoftenfive,butmaybethreeoranyothersmallnumber. Ifthetop‘n’firmsgainahighmarketsharetheindustryissaidtohavebecomemorehighlyconcentrated.

Concentration inCarbonatedDrinks!

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Marketshare

Coca-Cola PepsiCo DrPepperSnapple Cott NationalBeverage Other*

ADominantMonopoly inChewingGum!

57.9%

28.3%

5.3%

4.6%

3.9%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Wrigley

Mondelez

Hershey

PerfettiVanMelle

Allother

USAmarketsharein2015

TheHerfindahl-Hirschman Index(HHI)• Thisisameasureofmarketconcentration• Squaringthe%marketshareofeachfirminthemarketandsummingthesenumberscalculatetheindex.

• Forexampleinamarketconsistingofonlyfourfirmswithsharesof30%,30%,20%and20%theHerfindahlIndexwouldbe2600(900+900+400+400).

• Theindexcanbeashighas10,000ifthemarketisapuremonopoly(100*)

• Thelowertheindexthemorecompetitivethemarketisandcanreachalmostzeroforperfectcompetition

• Ifanindustryhas1000companieseachwith0.1%marketsharethentheindexwouldonlybe10(1000x0.1*).

• AmarketwithaHHImeasureexceeding2,000canbecharacterisedas'highlyconcentrated.

• Forexample,ifalocalradiostationmarketconsistedoftwocompanieswith40percenteach,andoftwocompanieswith10percenteach,itwouldhaveanHHIof3,400

TheHerfindahl-Hirschman Index(HHI)

• ThesuperiorqualityandaccuracyoftheHerfindahlIndexoverthesimpleconcentrationratiocanbeseenwhenthreemarketsareexaminedeachwithafourfirmconcentrationratioof85%.• Assumethatineachmarket15firmseachwith1%marketsharecontroltheremaining15%ofthemarket.

1. MarketA:40%20%20%5%=85%- HerfindahlIndex=2440

2. MarketB:25%20%20%20%=85%- HerfindahlIndex=1840

3. MarketC:75%5%3%2%=85%HerfindahlIndex=5678

MarketShareinUKSoftDrinksIndustry

30.8%

14.7%

7.1%

3.4%

2.8%

2.8%

1.6%

1.2%

1.1%

0.8%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

PrivateLabel

CocaCola(nonalcoholic)

Pepsi(nonalcoholic)

Lucozade

Robinsons

Volvic

Tropicana

Innocent

Ribena

RedBull

Marketshareaspercentage

MarketShareinUKSoftDrinksIndustry

• Competitivemarketsareindustrieswheretheyintensityofcompetitionbetweensuppliersishigh

• Therearemanykeycharacteristicsofcompetitivemarkets1. Manysellersnoneofwhomhasadominantmonopolyposition2. Sellersproduceslightlydifferentiatedproductsgivingconsumers

plentyofchoice– leadingtoahighcross-priceelasticityofdemand3. Thebarrierstoenteringthemarketarelow,allowingnewfirms

withnewproductstocomeintothemarketinpursuitofprofit4. Eachsellerhasgoodaccesstotheprevailingindustrytechnologies5. Consumerloyaltytoestablishedbusinessesisfairlyweak6. Buyersandsellershavefullinformationaboutpricessothatiteasy

forbuyerstofindthesellerofferingthebestvalueformoney• Themorecompetitiveisamarket,themorelikelythatan

allocativelyefficientoutcomeisachieved

CompetitiveMarkets

ContestableOligopoly– CoffeeStores

• “TheUK'sloveforcoffeeisbooming,withthenumberofcoffeeshopsmorethandoublinginthelastdecade.Anewreportshowstherearenow20,728outletsacrosstheUK,oneforevery3,000people,upfrom8,887outletsintheUKtenyearsago.ThestudybyAllegraStrategiesalsofoundthatthreeofthelargestbrands-Costa,StarbucksandCaffeNero- haveoverhalfofthemarketbetweenthem.”

LocationofCostaCoffeeStoresinLondon

Competition inUKCoffeeRetailSector

• CostahasbecomefarandawaytheUK’sleadingretailcoffeechainbothintermsofoutletsandtotalrevenue

733.9

398

200

20 140

100

200

300

400

500

600

700

800

Turnoverin£millionin2013

Annualturnoverofleadingcoffeechains

1,552

760

530

429

315

304

104

70

45

35

0 500 1000 1500 2000

Costa

Starbucks

CaffèNero

SSP*

WildBean Café

M&SCafé

Coffee Republic

AMTCoffee

MuffinBreak

Thorntons Cafés

Number ofoutlets in2013CoffeeOutlets

Dataisfor2013

Duopoly– USEnergyDrinksMarket(2015)

41%38.9%

8.8%

3.8% 2.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

RedBullNorthAmerica

MonsterBeverage

Corporation

RockstarInc. MonsterBeverageCorp.

PepsiCoInc.

Marketshare

Duopoly– USConfectioneryMarket2015

31.3%

29.1%

5.4%

5.4%

5%

3.3%

2.5%

18%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Hershey

Mars

Mondelèz

Lindt/Ghirardelli

Nestlé

Privatelabel

Ferrara

AllOther

Marketshare

Digitalrevenuemarketshareoflargestrecordcompanies

9.3% 7.3%

15.3% 15.9%17.1% 17.7%

25.6%22.7%

20.9%23.8%

21.1%21.5%

22.3%22.3%

28.7% 32.6% 39.7% 36.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2011 2012 2013 2014

Marketshare

EMI WarnerMusicGroup Independents

SonyMusicEntertainment UniversalMusicGroup

Summaryofimperfectcompetition

Characteristic Monopoly Oligopoly MonopolisticCompetition

Nooffirms Pure:OneWorking:>25%

Fewdominantsellers Many competingsellers

Typeofproduct Branded/oftenpatented

Branded(important)

Differentiated–manysimilarproducts

BarrierstoentryHighespeciallywithnaturalmonopoly

High– protectingmarketpowerofestablishedfirms

Low– easeofentryandexit inthelongrun

Pricingpower High– limitedbymarketdemand

Strong– butinterdependent

Somepricingpowerbuthighpriceelasticity

Supernormalprofitsinlongrun

High monopolyprofitspossible

Highbecauseofbarrierstoentry

Profitscompetedawaybyentry ofnewproducts