Concentration:
-> DEF: way to measure the degree of concentration (of market power) within markets
- Antitrust agiencies evaluate a potential violation of competition laws, measuring concentration within the relevant market.
-> DEPENDS ON: size & number of the firms belonging to the focal industry.
- Concentration industry
- Few firms
- Many firms, with few of very large size
- Entropy index: degree of dispersion of the index
- Dispersed industry
- Many firms
- None of the firms has a dominant position (they are asymmetric)
-> IN A NUTSHELL:
- Useful to get a clear & immediate snapshot of the focal industry
- Fundamental metric for antitrust agiencies
- Affects firms’ behavior and offers indications on competition mechanisms
❓Is concentration leading to market power or viceversa?
-> Is BIDIRETIONAL, More M.P. there is more can lead to increase concentration and kick out other companies.
- Oligopolistic Industries: high concentration. Maximum Level of concentration: monopoly
- Competitive Industries: low concentration. Minimum Level: perfect competition
Operationalizatoin
MARKET SHARE: ratio between sales of firm i and total sales in industry j.
- Q: sales of the firm i in industry j
- N: # of firms
- S: market share
Market Shares:
=> We can easely derive the sum of sales
Concentration Vector
-> DEF: The concentration vector lists market shares in descending order, in order to emphasize the presence of large firms in a given industry
- Immediately understand the market concentration.
| Firm | Output | Market share |
| 1 | 500 | 0.5 |
| 2 | 300 | 0.3 |
| 3 | 100 | 0.1 |
| 4 | 70 | 0.07 |
| 5 | 25 | 0.025 |
| 6 | 5 | 0.005 |
| 1000 | 1 |
Concentration Curve:
-> DEF: representation of concentration in the Cartesian plane (for a certain industry at time t) is given by the concentration curve
- Horizontal axis: firms ordered in decreasing order by size (from the largest to the smallest)
- Vertical axis: Cumulative Market Shares (CMS): sum of the market shares relative to that size.
Concentration Indices
-> OBJ:
- Synthesize in one index the entire information contained in the concentration vector.
- Facilitate the comparison between the degree of concentration in different periods and industries
-> TYPE:
- ABSOLUTE: weighted sum of market shares. With different weights, different concentration indices are identified
-> Capture market shares
- RELATIVE: capture the degree of inequality between firm sizes within a certain industry
Absolute:
Concentration Ratio
-> DEF: sum of the market shares of the first k firms, in decreasing orde
- Weight for the first k firms
- Weight for the remaining N-k firms.
-> k = 3, 4, 8, 20 usually
-> CRITICALITIES:
- Choiche of k arbitrary
- Provides the same result for industries with different concentration
-> EX:
- Industry A:
- Industry B: monopoly, one strong firm
=>
-> While in A market shares are evenly spread, in B there is one firm that controls almost 40% of the market: this crucial information is lost.
Herfindahl Index:
-> DEF: weight of each share is given by the share itself:
=> The HI is given by the sum of the square of the market shares
- HI ranges from 0 to 1
=> The larger a firm, the more it contributes to the value of the index
-> CASES:
- If there are N firms with the same size =>
- Perfec Competition:
- Monopoly:
Entropy Index:
-> DEF: weight of each share is equal to the logarithm of the inverse of the market share
- Smaller firms provide a greater contribution to the total amount of the index through the inverse of the logarithm
- Similar to herfindahl, we give more importance to the lower MS (instead the higher)
-> Provides a measure of disorder, ranging from 0 to infinity.
- Only one firm, minimal entropy:
- Industry with identical firms, entropy increases together, approaching infinity infperfec competition
Degree of Disaggregation:
-> COMPARE concentration
- Btw differen tindustries at the same time
- In the same industry over time
-> Degree of disaggregation:
- Is defined relying on the classification of production activities
- Needs to be the same in dored to meaningfully compare results
- Of the industry has impact on concentration (increasing the degree of disaggregation, concentration increases as well)
-> There are several national & intrnational classification of production activities that allow for a shared definition of the industries:
- ATECO: Attività ECOnomiche (ISTAT, italy)
- NACE: Nomenclature statistique de Activités èéconomiques dans la Communauté Européenne (Europe)
- SIC, Standard Industrial Classification (US)
Relative:
-> Relative concentration indices measure the degree of size inequality among firsm.
- Graphically -> Lorenz Curve
- Numerically -> Gini Index
-> These measures are traditionally adopted in labor economics in order to measure income inequality and income distribution.
Lorenz Curve:
-> DEF: firms are put in increasing order:
- On the horizontal axis: cumulated share of the number of firms (e.g. The 10% smallest firms…)
-> Increasingly: Smallest firm at the beginning.
- On the vertical axis: cumulated market shares (e.g. …produce 20% of the industry output)
-> The upper bound of the curve is given by the perfect equality line
PERFECT EQUALITY LINE: is the shape the Lorenz curve would get assuming perfect equality:
- The first 10% of the firms produce 10% of the output
- The second 20% of the firms produce 20% of the output
CONCENTRATION AREA: the portion of plane comprised between the Lorenz curve and the perfect equality line.
Gini Index
-> DEF: ratio between the concentration area and the area underlying the perfect equality line
-> Varies btw 0 & 1:
- All firms same size:
- The absolute equality line and the Lorenz curve coincide
- The concentration area is null
- The Gini index is equal to 0
- One firm produces for entire industry:
- The concentration area coincides with area underlying the perfect equality line
- The Gini index is equal to 1
Qualitative Classification
-> DEF: way to recognise different descriptions, qualitative, of industrial structure, based on the market shares.
-> Synthesizes industry concentration in a finite number of categories:
- Monopoly: there is one firm with a market share higher than 80%
- Dominating firm: there is one firm with a market share between 50% and 80%, and the others are much smaller
- Duopoly: 2 firms of similar size control at least 80% of the market
- Asymmetric oligopoly: 3 or 4 firms control at least 80% of the market, the highest share being at least 40%
- Symmetric oligopoly: 3 or 4 firms equally control at least 80% of the market, all individual shares being lower than 40%
- Asymmetric competition: the largest firm holds a market share between 20% and 50%
- Symmetric competition: the largest firm controls at most 20% of the market
