What is Market Concentration?
Market concentration is a measure of the size of firms in an industry, and the amount of market control they have over the industry. It is a measure of how competitive an industry is, and how easy it is for new entrants to gain a foothold. It is calculated by looking at the market share of the largest firms in the industry, and comparing this to the total market size.
How is Market Concentration Calculated?
Market concentration is calculated using the Herfindahl–Hirschman Index (HHI). This index is calculated by summing the squares of each firm’s market share in the industry. The higher the HHI, the greater the market concentration.
Examples of Market Concentration
Market concentration can be seen in many industries. Here are some examples:
- The retail banking industry is highly concentrated, with the four largest banks controlling around 75% of the market.
- The US airline industry is also highly concentrated, with the four largest airlines controlling around 80% of the market.
- The US beer industry is fairly concentrated, with the top two companies controlling around 50% of the market.
- The mobile phone industry is not very concentrated, with the top two companies controlling around 25% of the market.
Conclusion
Market concentration is an important concept in economics, as it can influence the competitiveness of an industry. Industries with high market concentration are generally less competitive, as it is more difficult for new entrants to gain a foothold. Industries with low market concentration are generally more competitive, as it is easier for new entrants to gain a foothold. References