Market concentration

To ascertain whether an industry is competitive or not, it is employed in antitrust law land economic regulation.

In most cases, high market concentration produces undesirable consequences such as reduced competition and higher prices.

Market concentration is affected through various forces, including barriers to entry and existing competition.

There are various factors that affect the concentration of specific markets which include; barriers to entry(high start-up costs, high economies of scale, brand loyalty), industry size and age, product differentiation and current advertising levels.

There are also firm specific factors affecting market concentration, including: research and development levels, and the human capital requirements.

A result of 1 would indicate a pure monopoly, and will decrease with the number of active firms in the market, and nonincreasing in the degree of symmetry between them.

[10] Since the passing of the act, these metrics have also been used to evaluate potential mergers' effect on overall market competition and overall consumer welfare.

The first major example of the Sherman Act being imposed on a company to prevent potential consumer abuse through excessive market concentration was in the 1911 court case of Standard Oil Co. of New Jersey v. United States where after determining Standard Oil was monopolising the petroleum industry, the court-ordered remedy was the breakup into 34 smaller companies.

[11] Modern regulatory bodies state that an increase in market concentration can inhibit innovation, and have detrimental effects on overall consumer welfare.

The United States Department of Justice determined that any merger that increases the HHI by more than 200 proposes a legitimate concern to antitrust laws and consumer welfare .

[13] Whereas the European Commission is unlikely to contest any horizontal integration, which post merger HHI is under 2000 (except in special circumstances).

[18] There are game theoretic models of market interaction (e.g. among oligopolists) that predict that an increase in market concentration will result in higher prices and lower consumer welfare even when collusion in the sense of cartelization (i.e. explicit collusion) is absent.

[20] Demsetz held an alternative view where he found a positive relationship between the margins of specifically the largest firms within a concentrated industry and collusion as to pricing.

[24] The above positions of Bain (1956) as well as Collins and Preston (1969) are not only supportive of collusion but also of the efficiency-profitability hypothesis: profits are higher for bigger firms within a greater concentrated market as this concentration signifies greater efficiency through mass production.

[25] In particular, economies of scale was the greatest kind of efficiency that large firms could achieve in influencing their costs, granting them greater market share.

However, Blundell et al. observed a positive correlation by tallying the patents lodged by firms.

[26] Schumpeter also failed to distinguish between the different technologies that contribute to innovation and did not properly define “creative destruction”.

[27] Research presented by Aghion et al. (2005) suggested an inverted U-shape model that represents the relationship between market concentration and innovation.

Delbono and Lambertini modelled empirical evidence onto a graph and found that the pattern demonstrated by the data supported the existence of a U-shaped relationship between these two variables.

[28] Regulation of market concentration The existence of economic regulations like the Competition Act and antitrust laws like the Sherman Act is due to the necessity of maintaining market competition in order to avoid the formation of monopolies.

In some cases, antitrust laws may require the breakup of firms or the establishment of “firewalls” that prevent the potential abuse of power.

Antitrust laws and other economic regulations safeguard market competition and the avoidance of monopolies.