Actually, concentration measures are both economic indexes and tools that obviously concern market concentration. By the way, most commonly, the discussed term can be often referred to as concentration merely. In order to reveal the nature of the concentration of this type, one should undoubtedly describe it as a subsistence of both a relative value and a quantity of enterprises that operate within the certain market. Apart from this, I feel the desire to note that market concentration is connected with the production concentration concept, providing the absorption of cognate products manufacturing within several large regional enterprises.
Concentration Measures Themselves
As was mentioned above, such kind of measures serves as an inevitable part of the entire concept of market concentration. Thus, it appears to be paramount to ponder over their types. The two most popular ratios amid economists are HHI (or Herfindahl-Hirschman Index) and CR (or concentration ratio). Talking about the first index, it should be highlighted that its normalized figure fluctuates within the range of 0 to 1.
Note: N stands for the quantity of companies in the market
If we just proceed to the last mentioned index – concentration ration – it is worthwhile noting that it ranges from 0 to 100 (percentage). In case, the indicator is absolute 100 per cent (total concentration), this means a monopoly happens to be. When we are capable of seeing the zero-figure (or no concentration), this is intended by perfect competition. There are also low, medium, and high concentrations.
In the predominant majority of cases over the latest historical data, states have always strived both for peer rights for all the companies in their local markets and for maintenance of duly competition with a target of providing their residents with the production of the highest quality only. This can be reached, if firms will depend on each other. When one company decide to form either a volume of production or a pricing policy for its articles, the other one (being a rival) will have to somehow react. Hence, the market concentration is high enough.
If we just turn upon the phenomenon of merger, it is fairly important to note mention that an actual merger is very rare, as most commonly, it is rather an acquisition. The key essence here is said to be an effect of synergy. Companies tend to call to a soi-disant interlock in order to maximize their profit from the mutual, tough, and thorough collaboration.
Generally, the activity called merger usually is referred to large companies with relatively equal assets shares. A precise estimation concerning a level of either market competition or concentration is calculated while drawing a significant attention to the most powerful firms. In case, for instance, two of them merge, a degree of concentration will move off dead center; in other words, companies will feel the merger’s impact. The main importance considering HHI is to monitor whether an extent of rivalry is acceptable for local markets, as monopolization of any industry is not often favorable for a country at least. Concentration ratio dedicate much attention to oligopolistic branches by calculating the market control of generally four or eight firms.
Interpretation of results is as important as the process done. Concentration ratio possesses the following problems:
1) A form size distribution is not always provided;
2) This index does not utilize all the market shares of each company presented in the industry;
3) Not all the details about rivalry are indicated.
At the same time, HHI reveals a few problems as well. They are, for example:
1) The index demands a lot of information before calculation comparing to the aforementioned concentration ratio;
2) Meaning in figures is also difficult enough. The absence of intuiting comprehension is quite visible. For instance, if CR’s indicator of 10 stands for 10 per cent of the entire sales within industry by four or eight firms, what does the HHI’s indicator of 176,6 actually mean?