Part II: Structural Analysis of the Industry II.3. Concentration : Measurement and trends SLIDESHOW 8 Flashcards
As a reminder, what are the 2 components of seller concentration?
1\ Number of firms
2\ Size distribution of firms
What are the 2 components of the definition of the market?
1\ Product dimension
2\ Geographic dimension
How de we measure the consumer substitution?
Through the cross-price elasticity of demand
What does it mean if the CED is large and positive? (consumption point of view)
2 goods are close substitutes in consumption
What does it mean if the CED is large and negative?
2 goods are close complements
What does it mean if CED is negative? (production point of view)
Goods are substitutes in production
What does geographic market definition refer to?
The determination of effect of an increase in the price on a product and the consequences on the demand or supply in another location. Thus, for same product???
What does the word industry stand for?
Market’s supply side
What does the word market stand for?
Supply/production and demand/consumption
What is the objectives of the NACE?
1\ standardize industry definitions
2\ inter-country comparisons
3\ harmonization of competition industrial policy
What are the 2 levels making it possible to measure seller concentration?
1\ Geographical boundary
2\ Members of some industry or market
What is the 1st type of seller concentration?
The Aggregate Concentration
What does AC reflect and how is it measured?
It reflects the importance of the largest firms. And it is measured as the share of the n largest firms in the total sales, assets or employment for the economy
What could happen if AC is high?
The economy’s largest firms have opportunities to exert a disproportionate degree of influence over politicians or regulators
What are the Hannah and Kay’s criteria for concentration measures?
The market share distribution has an impact on seller concentration
What does the n-firm concentration ratio (CRn) measure?
The share of the industry’s n largest firms in some measure of total industry size. Calcul montant/somme des montants
What is the basis of the Herfindahl-Hirschman index?
The sum of the squared market shares of all firms in the industry
What does it mean if HH=1?
Single monopoly producer.
Be careful with the numbers equivalent of the HH index (1/HH) = 1, one dominant firm.
HH = 1/N : N equal-sized firms
What is the minimum possible value in an industry?
HH = 1/N
–> N equal-sized firms
Between the n-firm ration and the HH index, which is the most satisfactory in respect of their ability to satisfy the Hannah and Kay criteria?
HH index
What is the entropy coefficient?
The weighted sum concentration measure. But the weights are inversely related to the firms’ market shares
What does it mean if E is small?
Highly concentrated industry
What does it mean if E is large?
Industry with low concentration
E=0?
Single monopoly producer
E = log(N)
N equal-sized firms
Why is it inconvenient to use E?
Because it depends on the number of firms. Solution : Standardized entropy = RE
RE = 0
Monopoly
RE = 1
N equal-sized firms
What is the variance?
A standard measure of dispersion or inequality within any data set
High variance?
Low variance?
High : inequality
Low : same size firms
Why is VL a good provider of measure of inequality across the entire firm size distribution?
Log-transformation reduces or eliminates the skewness in the original distribution. VL is unaffected by scaling
What does the Lorenz curve show?
The variation in the cumulative size of the n largest firms in an industry, as n varies from 1 to N
How is the Lorenz curve if all the firms are equal sized?
45-degree line
How is the Lorenz curve if the size distribution is skewed?
Lorenz curve is concave
Gini = 1
One dominant firm with a market share approaching one
G = 0
N equal-sized firms
What is the Gini coefficient?
A measure of inequality in the firm size distribution. (Households incomes)
What are the issues with these calculations?
Specific industry, which boundary?
What if calculations only take in consideration domestic data?
Understate the true degree of concentration
What if calculations only take in consideration a firm’s reported accounts?
Not take account of diversification
