CONCENTRATED AND NON-CONCENTRATED MARKETS
Question
Why do some markets
become concentrated
and others do
not?
Increased
or decreased market concentration often signifies one or more of the following
factors:
Stronger or weaker market entry barriers.
Both government and existing
competitors can make it more difficult or favourable to enter a market.
Government could, for instance, make things more, or less, challenging, if it
created cumbersome licencing requirements, or business-friendlier ones. Competitors
could make entry by new players harder by, for example, entering into exclusive
contracts with customers.
Another
way to weaken barriers to entry is legislating for common industry standards by
government rather than allowing an industry player to set the standards, as
they could easily be manipulated by the supplier to their own benefit and to
the detriment of others. This is especially important in the case of technical
products.
Making
anti-trust laws more or less effective. Anti-trust laws are meant to prevent
any single player, or a few, entirely dominating the market. One result of lax
anti-trust laws is mergers and acquisitions that eliminate all competition. In a country where there are only two brewing companies, for example, acquisition of one brewing company by the other may not be allowed if a pro-competition stand were stronger.
Unfavourable or favourable start-upcosts. When starting a business is
highly capital-intensive, there are greater chances of the market being concentrated
than when initial costs are low. Some industries, such
as underground mining and airline, by their very nature are - in general - inherently
concentrated. In one market, there are, at the moment, only four cement-manufacturing
companies. That is to be contrasted with the market for soft drinks and juices
where there are numerous suppliers and entry capital is relatively low.
Rent-seeking. This refers to tendency to manipulate the established system to gain in some way. For example, a firm paying a government official to preserve or improve its market power. In the idealistic environment, there is much
less rent-seeking. Existing companies are not able to get away with
rent-seeking manoeuvres: they let new competitors enter the market unhindered -
and only maintain or improve their position by creating, innovating, investing and
raising productivity (output per unit of investment, which represents falling
costs).
