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What is Industry Concentration?
Industry concentration refers to the extent to which a small number of firms dominate total production, sales, or market share within an industry. It is used to assess competition levels and market power.
Definition
Industry concentration is a measure of how much market share is controlled by the largest firms in an industry.
Key Takeaways
- Indicates the level of competition within an industry.
- High concentration suggests fewer dominant firms.
- Commonly measured using concentration ratios and the Herfindahl–Hirschman Index (HHI).
Understanding Industry Concentration
Industry concentration helps economists, regulators, and businesses understand market structure. Highly concentrated industries may exhibit pricing power, barriers to entry, and reduced competition, while low concentration typically signals competitive markets.
Regulatory authorities monitor concentration to prevent monopolistic practices and assess mergers and acquisitions. Businesses use concentration analysis to evaluate competitive intensity and strategic positioning.
Concentration levels can change over time due to innovation, regulation, globalization, or consolidation.
Types or Variations
Low Concentration: Many firms with small market shares.
Moderate Concentration: Several firms with significant shares.
High Concentration: Few firms dominate the market.
Measurement Methods
Concentration Ratio (CR): Measures combined market share of top firms (e.g., CR4).
Herfindahl–Hirschman Index (HHI): Sum of squared market shares of all firms.
Real-World Example
The global smartphone operating system market is highly concentrated, with Android and iOS accounting for the majority of market share.
Importance in Business or Economics
Industry concentration affects pricing, innovation, consumer choice, and regulatory oversight. It influences strategic decisions such as market entry, expansion, and mergers.
Related Terms
- Market Structure
- Monopoly
- Competition Policy
Sources and Further Reading
- Investopedia
- Organisation for Economic Co-operation and Development (OECD)
- U.S. Department of Justice – Antitrust Division
Quick Reference
- Purpose: Assess market dominance.
- Key Metrics: CR, HHI.
- Used By: Regulators, economists, businesses.
Frequently Asked Questions (FAQs)
Why is industry concentration important?
It helps assess competition, market power, and potential regulatory concerns.
Does high concentration always mean less competition?
Not always, innovation and global competition can still exert pressure.
Who monitors industry concentration?
Competition authorities and antitrust regulators.
