ECONOMICS - Concentrated/Non-concentrated Markets

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).