Lecture 19
INDUSTRY CONCENTRATION
Measures of concentration
1. Four-firm concentration ratio (CR4)
- Percentage of industry sales accounted for by top 4 firms in the industry
1.1 Classification of industries
| CR value |
Market structure |
| CR4 < 40 |
Effectively competitive |
| 40 < CR4 < 60 |
Loose oligopoly |
| CR4 > 60 |
Tight oligopoly |
| CR1 > 90 |
Effective monopoly |
2. The Herfindahl-Hirschman Index (HHI)
- HHI = s12 + s22 + s32 + ... + sn2,
where si = market share of the i-th firm, and n is the number of firms in the industry.
- In perfect competition, HHI is close to zero
- For a monopoly, HHI = 10,000
3. Using Concentration Measures in Merger Cases
- Markets with HHI > 1,800 are highly concentrated.
- A merger that creates or further consolidates a highly concentrated market that involves an increase in the HHI of more than 100 points is presumed to substantially lessen competition or tend to create a monopoly.
- The Agencies (DOJ and FTC) also may examine the market share of the merged firm: a merger that creates a firm with a share over 30% is also presumed to substantially lessen competition or tend to create a monopoly if it also involves an increase in HHI of more than 100 points.
Source: Merger Guidelines (pdf):
3. Shortcomings of Concentration Measures
Defining the relevant market
- Industry may not be the same as markets:
Pharmaceutical industry vs market for cancer-treatment drugs
- Geographical scope of the market:
National market vs local markets
- Barriers to entry in the industry:
Do they exist?
Omission of imports
- Production data may offer misleading picture of degree of competition in an industry:
Better to use sales data (why?)