Alternative measures of industry concentrationIntroductionIndustry concentration refers to the extent to which the production capacity of an industry rests on a few players in the market. This is can be estimated in a number of techniques including the use of graphs, tables and figures. Arguably, industry concentration is a common concept in the contemporary business world considering that the major players and price makers are engaging in serious mergers and acquisitions. Apparently a merger between two organizations that control a significant share of the market comes with a number of advantages (Albarran et al 2006).
Perhaps the most notable merit of such mergers is that a company becomes a better producer and bigger shareholder in the industry. Mergers reduce the number of autonomous players in the industry and increase chances of monopolies. Depending on the nature of an industry, production can be vested in very few organizations. This is what brings about the aspect of market concentration. This paper endeavors to explain various alternative industry concentration measures in light of the automobile industry in Europe. Before focusing on the various alternative measures, it is important to have a perfect understanding of some of the key considerations that need to be held during the evaluation of the industry in light of market concentration.
Worth noting is the fact that in a monopoly market, the market concentration is 1 or 100 percent depending on the scale used (Waterman & Weiss 2007). For purposes of making comparisons, the economists suggest that the scale to be used should range between 0 and 1. This scale is suitable in the sense that a person can easily and flexibly work with either ratios or fractions.
It is as well important to note that when a market concentration calculation is conducted, it may not be practicable to estimate the impact of one firm leaving the market or independently making expansions or acquisitions. However, the use of such methods as the Herfindahl-Hirschman (HH) index can reveal a number of details concerning changes in a single component of the market concentration. The industry concentration curve The industry concentration curve is arguably the most common method applied in measuring industry concentration.
The curve plotted on a two plane graph like framework, considers the industry players on the horizontal (X axis) and the market share on the vertical (Y axis) the curve then shows the degree to which an individual firm controls the market. The curve shows those firms with the highest or rather biggest share of the market at the highest tangent of the curve (Tremblay & Tremblay 2007). This way, the industry concentration can be established by finding the difference between the largest shareholders and the whole market.
In simpler terms, the area or share covered by the biggest market players is evaluated in relation to the market. The industry concentration curve indicates the differences in the market brought about by the entry of new firm. Worth noting is the fact that the entrance of a new organization into an industry where the market concentration is considerably high, can be a very costly affair depending on the relative size of the market, the capital outlay required and the marketing strategies to be employed. An increase in the number of principal players in the market decreases market concentration.
The opposite is true. A decease in the number of firms in the market increases industry concentration since industry concentration is evaluated in relation to the entire market. Similarly, a merger condition brings about changes in the market concentration. When the top firms merge within the industry, the market concentration goes up. There are two reasons as to why this happens. The significant reason is that when firms merge, the number of autonomous firms automatically decreases (Dixon, R. 2008). The second reason is that when such firms merge, the production capacity of the resultant organization increases following the merits of such a merger.
Notably, mergers boost the synergy of the merging firms in such a way that they stop being price takers and start operating as price makers.