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Market Concentration

Students should be able to:
Understand market concentration ratios
Be able to interpret the meaning and significance for business behaviour

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Market Concentration

  1. 1. What do we mean by market concentration? Topic 3.3.8
  2. 2. What do we mean by market concentration? Topic 3.3.8 Students should be able to: • Understand market concentration ratios • Be able to interpret the meaning and significance for business behaviour
  3. 3. Key Concepts – Market Structures Monopolistic Competition A market structure characterized by many buyers and sellers of slightly different products and easy entry to, and exit from, the industry. Monopsony When a single buyer controls the market for a particular good or service Oligopoly An oligopoly is a market dominated by a few producers, each of which has control over the market. Perfect competition Theoretical condition of a market where prices reflect complete mobility of resources and freedom of entry and exit
  4. 4. What is Market Concentration? • Market share in simple terms is the proportion of the sales relative to other firms • The concentration ratio measures the combined market share of the top ‘n’ firms in the industry. • Share can be by sales, employment or any other relevant indicator. • The value of ‘n’ is often five, but may be three or any other small number. If the top ‘n’ firms gain a high market share the industry is said to have become more highly concentrated.
  5. 5. Concentration in Carbonated Drinks! 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Marketshare Coca-Cola PepsiCo Dr Pepper Snapple Cott National Beverage Other*
  6. 6. A Dominant Monopoly in Chewing Gum! 57.9% 28.3% 5.3% 4.6% 3.9% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% Wrigley Mondelez Hershey Perfetti Van Melle All other USA market share in 2015
  7. 7. The Herfindahl-Hirschman Index (HHI) • This is a measure of market concentration • Squaring the % market share of each firm in the market and summing these numbers calculate the index. • For example in a market consisting of only four firms with shares of 30%, 30%, 20% and 20% the Herfindahl Index would be 2600 (900 + 900+ 400+ 400). • The index can be as high as 10,000 if the market is a pure monopoly (100*) • The lower the index the more competitive the market is and can reach almost zero for perfect competition • If an industry has 1000 companies each with 0.1% market share then the index would only be 10 (1000 x 0.1*). • A market with a HHI measure exceeding 2,000 can be characterised as 'highly concentrated. • For example, if a local radio station market consisted of two companies with 40 per cent each, and of two companies with 10 per cent each, it would have an HHI of 3,400
  8. 8. The Herfindahl-Hirschman Index (HHI) • The superior quality and accuracy of the Herfindahl Index over the simple concentration ratio can be seen when three markets are examined each with a four firm concentration ratio of 85%. • Assume that in each market 15 firms each with 1% market share control the remaining 15% of the market. 1. Market A: 40% 20% 20% 5% = 85% - Herfindahl Index = 2440 2. Market B: 25% 20% 20% 20% = 85% - Herfindahl Index =1840 3. Market C: 75% 5% 3% 2% = 85% Herfindahl Index = 5678
  9. 9. Market Share in UK Soft Drinks Industry 30.8% 14.7% 7.1% 3.4% 2.8% 2.8% 1.6% 1.2% 1.1% 0.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% Private Label Coca Cola (non alcoholic) Pepsi (non alcoholic) Lucozade Robinsons Volvic Tropicana Innocent Ribena Red Bull Market share as percentage
  10. 10. Market Share in UK Soft Drinks Industry
  11. 11. • Competitive markets are industries where they intensity of competition between suppliers is high • There are many key characteristics of competitive markets 1. Many sellers none of whom has a dominant monopoly position 2. Sellers produce slightly differentiated products giving consumers plenty of choice – leading to a high cross-price elasticity of demand 3. The barriers to entering the market are low, allowing new firms with new products to come into the market in pursuit of profit 4. Each seller has good access to the prevailing industry technologies 5. Consumer loyalty to established businesses is fairly weak 6. Buyers and sellers have full information about prices so that it easy for buyers to find the seller offering the best value for money • The more competitive is a market, the more likely that an allocatively efficient outcome is achieved Competitive Markets
  12. 12. Contestable Oligopoly – Coffee Stores • “The UK's love for coffee is booming, with the number of coffee shops more than doubling in the last decade. A new report shows there are now 20,728 outlets across the UK, one for every 3,000 people, up from 8,887 outlets in the UK ten years ago. The study by Allegra Strategies also found that three of the largest brands - Costa, Starbucks and Caffe Nero - have over half of the market between them.”
  13. 13. Location of Costa Coffee Stores in London
  14. 14. Competition in UK Coffee Retail Sector • Costa has become far and away the UK’s leading retail coffee chain both in terms of outlets and total revenue 733.9 398 200 20 14 0 100 200 300 400 500 600 700 800 Costa Starbucks*Caffè Nero AMT Coffee Muffin Break Turnoverin£millionin2013 Annual turnover of leading coffee chains 1,552 760 530 429 315 304 104 70 45 35 0 500 1000 1500 2000 Costa Starbucks Caffè Nero SSP* Wild Bean Café M&S Café Coffee Republic AMT Coffee Muffin Break Thorntons Cafés Number of outlets in 2013Coffee Outlets Data is for 2013
  15. 15. Duopoly – US Energy Drinks Market (2015) 41% 38.9% 8.8% 3.8% 2.6% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% Red Bull North America Monster Beverage Corporation Rockstar Inc. Monster Beverage Corp. PepsiCo Inc. Marketshare
  16. 16. Duopoly – US Confectionery Market 2015 31.3% 29.1% 5.4% 5.4% 5% 3.3% 2.5% 18% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% Hershey Mars Mondelèz Lindt/Ghirardelli Nestlé Private label Ferrara All Other Market share
  17. 17. Digital revenue market share of largest record companies 9.3% 7.3% 15.3% 15.9% 17.1% 17.7% 25.6% 22.7% 20.9% 23.8% 21.1% 21.5% 22.3% 22.3% 28.7% 32.6% 39.7% 36.1% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 2011 2012 2013 2014 Marketshare EMI Warner Music Group Independents Sony Music Entertainment Universal Music Group
  18. 18. What do we mean by market concentration? Topic 3.3.8

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