Seller Concentration

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  • Topic: Herfindahl index, Monopoly, Imperfect competition
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  • Published : November 4, 2012
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Economics Division
ID-4113M
Industrial Organisation
Level 2
2010/11

‘Seller concentration levels are of interest on both theoretical and public policy grounds’. Discuss.

Market structure plays an important role in any industry. Examining the market structure is essential for firms to perform well and behave rationally. The key characteristics of market structure include the number and size of firms, the existence and height barriers to entry and exit, and the degree of product differentiation. Seller concentration refers to the number and level of distribution of firms producing a particular type of output (Needham, 1978). Empirical evidence shows that market concentration level determines business behaviour; therefore seller concentration is one of the most often used indicators of industry structure and receives a lot of attention from economists and public policy makers. Hence, this essay is going to discuss seller concentration levels as interest on both theoretical and public policy grounds. It will explain the indices and determinants of seller concentration giving real world examples with a focus on consequences of seller concentration on markets and implications for policy making. In order to clearly understand the importance of seller concentration, it is essential to look at the different ways it is measured. First of all, seller concentration can be measured at two levels. The first is known as aggregate concentration. Aggregate concentration is measured as the share of n largest firms in the total sales, assets or employment (Lipczynski, Wilson and Goddard, 2005). A good example of aggregate concentration is the share of the five largest Member States in the European Union, value added. The average share for the non-financial business economy as a whole reached 72.8 % in 2007 (Euro Stat, 2011). The highest concentration level was for the manufacture of office machinery and computers, and the lowest for the manufacture of food and beverages. These concentration measures generally highlight the larger Member States; with occasional contributions from the Netherlands, Poland, Ireland, Denmark, Belgium, Finland or Sweden (Euro Stat, 2011). The second level of seller concentration is known as industry concentration or market concentration. It measures the proportion of total market supply that is accounted for by the production of a particular group of firms in the industry. There are many indices being used by policy makers to measure market concentration level. The most widely used indices are concentration ratios, Gini coefficient, Herfindahl- Hirschman index, Hannah and Kay index, entropy coefficient and the variance of logarithms in firm size. The concentration ratio measures the top 4 or 5 firms’ sum of market share. For example, the concentration ratio of grocery market in the UK (2009) was 81.4 %. Grocery market share (%)|

Tesco| 30.5|
Asda| 16.9|
Sainsbury's| 16.3|
Morrisons| 12.3|
Co-operative| 5.4|
Table 1- Grocery market in the UK (2009)
(TNS, 2011)
However this ratio does not include the rest of firms and does not consider the distribution of them. As a result, many economists argue that this type of measurement is too simple and more accurate indices should be used. One of such indices is Gini coefficient. This coefficient involves all the firms in the industry and shows the level of inequality in firms’ size distribution. The value of Gini coefficient varies between 0 and 1, where 1 means that there is one dominant firm in the market (high concentration) (Lipczynski, Wilson and Goddard, 2005). Herfindahl- Hirschman index is calculated by the sum of the squares of the market shares of each firm. Therefore, larger firms get higher weighting to reflect their relative importance in the industry. Hence, the high index points out high level of concentration in the industry. Hannah and Kay criticised some ideas of Herfindahl- Hirschman index and suggested a new index in...
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