Abstract
In economics, we normally classify markets into four market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. In this chapter, we are interested in understanding why real markets are structured so differently. For example, most agricultural commodities approximate competitive markets, as they have many producers of homogeneous or nearly homogeneous goods. In contrast, the market of computer operating systems is nearly monopolized by Microsoft. In 2009, Microsoft Windows had a market share of approximately 92%, while its nearest competitor, Mac, had a market share of just over 5%.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
The market share for a particular firm is defined as the firm’s sales divided by industry sales, where sales are typically measured by output or by total revenue.
- 2.
For a discussion of the history of this index, see Hirschman (1964).
- 3.
To see this, note that the variance (σ 2) can be written as σ 2 = [Σms i 2/n − (Σms i /n)2]; market shares sum to 1 (when measured in decimals), so that Σms i = 1; HHI = Σms i 2. Thus, σ 2 = HHI/n–1/n 2. Solving for HHI gives HHI = nσ2 + 1/n. For a discussion of variance, see the Mathematics and Econometrics Appendix at the end of the book.
- 4.
When market share is measured in decimals, note that HHI is 0.24 or 2,400/10,000. The numbers equivalent is 1/0.24 or 4.17. These are frequented rounded off to the nearest counting number, which would be 4 in this case.
- 5.
The obvious drawback with HHI is that it requires sales data on every firm in the industry.
- 6.
US Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, April 2, 1992 and April 8, 1997. A comparison of the old with the new structural standard is difficult, because the new 2010 Merger Guidelines have more lenient standards and consider a broader set of factors. For further discussion of the 2010 Guidelines, see Chap. 20.
- 7.
US Department of Justice and the Federal Trade Commission, Horizontal Merger Guidelines, April 2, 1992 and April 8, 1997.
- 8.
This system of classifying industries has been in effect since 1997. Prior to 1997, data were published according to the Standard Industrial Classification (SIC) system.
- 9.
- 10.
A detailed comparison for all industries listed in Table 8.6 is not possible because some industries are defined differently in the NAICS system and the older SIC system.
- 11.
- 12.
This excludes microbrewers or specialty brewers that make European style ales and lagers and began entering the market in the mid 1960s. Although the number of specialty brewers exceeds 1,600 today, their combined market share is less than 6% and they generally compete for a different type of customer.
- 13.
In 1970, the two largest firms were the Anheuser-Busch and Miller brewing companies. In 2008, they were Anheuser-Busch and MillerCoors (the combined sales of the Miller and Coors brewing companies which formed a joint venture in 2008).
- 14.
To compare it to CR4, HHI is divided by 100 so that it ranges from 0 to 100.
- 15.
- 16.
For an excellent review of the influence of Gibrat’s work, see Sutton (1997).
- 17.
See the Mathematics and Econometrics Appendix at the end of the book for a review of a normal distribution and a standard deviation.
- 18.
In a lognormal distribution, the logarithm of firm size is normally distributed.
- 19.
These are the US, Canada, the UK, Sweden, France, and Germany.
- 20.
- 21.
Of course, firms could invest in research and development, which can change technology and lead to an increase or a decrease in scale economies.
- 22.
Here, we assume that x/MES produces an integer, thus avoiding problems with fractions.
- 23.
There are certain market settings where limit pricing can be effective. For example, Milgrom and Roberts (1982) show that limit pricing can effectively block entry when there is incomplete information. In their model, M has either the same or lower costs than PE, but only M knows if it is a low or a high cost producer. They show that if the probability that M is a low cost producer is sufficiently low, then it may be optimal for a high cost M to behave like a low cost M by charging a low price. This action will deter entry of PE.
- 24.
Sutton (2007, p. 2359) argues that if fixed costs are not sunk, then many of Sutton’s conclusions are invalid because it would then be more appropriate to assume that firms play a static rather than a dynamic game. When an investment such as this is made before any output is produced, it is a quasi-fixed cost (see Chap. 2).
- 25.
Sutton assumed a Cournot model which produces an outcome that lies between cartel and perfect competition. We will discuss the Cournot model in Chap. 10.
- 26.
Recall from Chap. 7 that differentiation can be vertical (e.g., quality differences) or horizontal (e.g., location differences). Because assuming vertical (quality) differentiation produces such dramatically different results, we focus on vertical differentiation here (found in Sutton 1991, Chap. 3). When differentiation is horizontal, Sutton shows that the relationship between concentration and market size is less precise than for the homogeneous goods case found in Fig. 8.9 (see Sutton 1991, pp. 37–42). With horizontal differentiation, acceptable concentration and market size values include the curve and all points to the north and east of the curve in Fig. 8.9. This is called a “bounds approach,” because the model provides bounds on the set of outcomes rather than pinning down a precise relationship.
- 27.
For example, if quality is a normal good, an increase in consumer income could increase sales and the demand for quality, which would induce firms to increase the quality of their products.
- 28.
In his work on research and development and sunk costs, Sutton (1999, 2007) also argues that concentration can vary, depending upon the type of technological trajectories that are characteristic of an industry. If, for example, goods are relatively homogeneous and firms compete in research and development that is designed to lower production cost (i.e., they follow a single technical trajectory), as in the aircraft industry, then concentration tends to rise over time and remain high. Alternatively, when many submarkets or niche markets exist, as in the flowmeter (i.e., devices that control the flow of gases and liquids through pipes) industry, firms may choose to compete in one or a few submarkets and pursue a proliferation of technical trajectories. This tends to keep concentration from increasing over time.
- 29.
Stigler (1966, 227) puts it this way: “if one can conceal the profitability of his situation, entry will be slower.”
- 30.
Sutton (1999) also finds support for his theory when research and development expenditures are the primary source of sunk costs.
- 31.
- 32.
Other studies include Robinson and Chiang (1996) for a sample of US consumer goods industries, Matraves (1999) for the global pharmaceutical industry, Lyons et al. (2001) for a sample of industries in the European Union, and V. Tremblay and C. Tremblay (2005) for the US brewing industry. See Sutton (2007) for a more extensive survey of the empirical evidence.
- 33.
A curve is convex when it lies above any tangent line to the curve.
References
Bain JS (1956) Barriers to new competition: their character and consequences in manufacturing industries. Harvard University Press, Cambridge, MA
Bain JS (1959) Industrial organization. Wiley, New York
Baumol WJ, Panzar JC, Willig R (1982) Contestable markets and the theory of industry structure. Harcort Brace Javonovich, Inc., New York
Demsetz H (1973) Industry structure, market rivalry, and public policy. J Law Econ 16(1):1–9
Ellickson PB (2007) Does Sutton apply to supermarkets? Rand J Econ 38(1):43–59
Hirschman AO (1964) The paternity of an index. Am Econ Rev 54(50):761
Kessides IN (1990) Market concentration, contestability, and sunk costs. Rev Econ Stat 72(4):614–622
Kwoka JE Jr (1985) The Herfindahl Index in theory and practice. Antitrust Bull 30:915–947
Lyons B, Matraves C, Moffat P (2001) Industrial concentration and market integration in the European Union. Economica 68(269):1–26
Martin S (2002) Advanced industrial organization. Blackwell, Maldenm MA
Matraves C (1999) Market structure, R&D and advertising in the pharmaceutical industry. J Ind Econ 47(2):169–194
McAfee RP, Mialon HM, Williams MA (2004) What is a barrier to entry. Am Econ Rev 94(2):461–465
Modigliani F (1958) New developments on the oligopoly front. J Polit Econ 66(2):215–232
Peltzman S (1975) The effects of automobile safety regulation. J Polit Econ 83:677–725
Scherer FM (1980) Industrial market structure and economic performance. Rand McNally, Chicago
Scherer FM, Beckenstein A, Kaufer E, Murphy RD (1975) The economics of multi-plant operation: an international comparisons study. Harvard University Press, Cambridge
Scherer FM, Ross D (1990) Industrial market structure and economic performance. Houghton Mifflin Co., Boston
Schmalensee R (1989) Inter-industry studies of structure and performance. In: Schmalensee R, Willig RD (eds) Handbook of industrial organization, vol II. North-Holland, New York, pp 951–1009
Shepherd WG (1984) ‘Contestabilty’ versus competition. Am Econ Rev 74:572–587
Smiley R (1988) Empirical evidence on strategic entry deterrence. Int J Ind Organ 6:167–180
Stigler GJ (1966) The theory of price. Macmillan, New York
Stigler GJ (1968) The organization of industry. Richard D. Irwin, Homewood, IL
Sutton J (1991) Sunk costs and market structure. MIT Press, Cambridge
Sutton J (1997) Gibrat’s Legacy. J Econ Lit
Sutton J (1999) Technology and market structure. MIT Press, Cambridge
Sutton J (2007) Market structure: theory and evidence. In: Armstrong M, Porter R (eds) Handbook of industrial organization, vol 3. Elsevier North Holland, Boston
Sylos-Labini P (1962) Oligopoly and technological progress. Harvard University Press, Cambridge
Symeonidis G (2000) Price competition and market structure: the impact of restrictive practices legislation on concentration in the U.K. J Ind Econ 48(1):1–26
Symeonidis G (2001) The effects of competition: Cartel policy and the evolution of strategy and structure in British industry. MIT Press, Cambridge
Tremblay VJ, Tremblay CH (2005) The U.S. brewing industry: data and economic analysis. MIT Press, Cambridge
von Weizsacker CC (1980) A welfare analysis of barriers to entry. Bell J Econ 11(2):399–420
White LJ (2002) Trends in aggregate concentration in the United States. J Econ Perspect 16(4):137–160
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2012 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Tremblay, V.J., Tremblay, C.H. (2012). Market Structure, Industry Concentration, and Barriers to Entry. In: New Perspectives on Industrial Organization. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-3241-8_8
Download citation
DOI: https://doi.org/10.1007/978-1-4614-3241-8_8
Published:
Publisher Name: Springer, New York, NY
Print ISBN: 978-1-4614-3240-1
Online ISBN: 978-1-4614-3241-8
eBook Packages: Business and EconomicsEconomics and Finance (R0)