Lecture 19
INDUSTRY CONCENTRATION

Measures of concentration

• Percentage of industry sales accounted for by top 4 firms in the industry

CR value	Market structure
CR4 < 40	Effectively competitive
40 < CR4 < 60	Loose oligopoly
CR4 > 60	Tight oligopoly
CR1 > 90	Effective monopoly

• HHI = s₁² + s₂² + s₃² + ... + s_n²,
  where s_i = 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
  
  
• Classification of markets, according to the the U.S. Department of Justice and the Federal Trade Commission:
  
  

  HHI	Concentration
  Less than 1500	Unconcentrated
  Between 1500 and 2500	Moderately concentrated
  Greater than 2500	Highly concentrated

  
  
  
• From the Horizontal Merger Guidelines (pdf):
  • Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and often warrant scrutiny.
  • Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power.
  • The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.

3. Shortcomings of concentration measure

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?

• Production data may offer misleading picture of degree of competition in an industry:
  Better to use sales data (why?)