Students should be able to: Understand market concentration ratios Be able to interpret the meaning and significance for business behaviour

1. What do we mean by market
concentration?
Topic 3.3.8

2. What do we mean by market
concentration?
Topic 3.3.8
Students should be able to:
• Understand market concentration ratios
• Be able to interpret the meaning and significance for
business behaviour

3. Key Concepts – Market Structures
Monopolistic
Competition
A market structure characterized by
many buyers and sellers of slightly
different products and easy entry to,
and exit from, the industry.
Monopsony
When a single buyer controls the market
for a particular good or service
Oligopoly
An oligopoly is a market dominated by a
few producers, each of which has control
over the market.
Perfect competition
Theoretical condition of a market where
prices reflect complete mobility of
resources and freedom of entry and exit

4. What is Market Concentration?
• Market share in simple terms is the proportion of the
sales relative to other firms
• The concentration ratio measures the combined market
share of the top ‘n’ firms in the industry.
• Share can be by sales, employment or any other relevant
indicator.
• The value of ‘n’ is often five, but may be three or any
other small number. If the top ‘n’ firms gain a high
market share the industry is said to have become more
highly concentrated.

5. Concentration in Carbonated Drinks!
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Marketshare
Coca-Cola PepsiCo Dr Pepper Snapple Cott National Beverage Other*

6. A Dominant Monopoly in Chewing Gum!
57.9%
28.3%
5.3%
4.6%
3.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Wrigley
Mondelez
Hershey
Perfetti Van Melle
All other
USA market share in 2015

7. The Herfindahl-Hirschman Index (HHI)
• This is a measure of market concentration
• Squaring the % market share of each firm in the market and summing
these numbers calculate the index.
• For example in a market consisting of only four firms with shares of
30%, 30%, 20% and 20% the Herfindahl Index would be 2600 (900 +
900+ 400+ 400).
• The index can be as high as 10,000 if the market is a pure monopoly
(100*)
• The lower the index the more competitive the market is and can reach
almost zero for perfect competition
• If an industry has 1000 companies each with 0.1% market share then
the index would only be 10 (1000 x 0.1*).
• A market with a HHI measure exceeding 2,000 can be characterised as
'highly concentrated.
• For example, if a local radio station market consisted of two companies
with 40 per cent each, and of two companies with 10 per cent each, it
would have an HHI of 3,400

8. The Herfindahl-Hirschman Index (HHI)
• The superior quality and accuracy of the Herfindahl
Index over the simple concentration ratio can be
seen when three markets are examined each with a
four firm concentration ratio of 85%.
• Assume that in each market 15 firms each with 1%
market share control the remaining 15% of the
market.
1. Market A: 40% 20% 20% 5% = 85% - Herfindahl
Index = 2440
2. Market B: 25% 20% 20% 20% = 85% - Herfindahl
Index =1840
3. Market C: 75% 5% 3% 2% = 85% Herfindahl Index =
5678

9. Market Share in UK Soft Drinks Industry
30.8%
14.7%
7.1%
3.4%
2.8%
2.8%
1.6%
1.2%
1.1%
0.8%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Private Label
Coca Cola (non alcoholic)
Pepsi (non alcoholic)
Lucozade
Robinsons
Volvic
Tropicana
Innocent
Ribena
Red Bull
Market share as percentage

10. Market Share in UK Soft Drinks Industry

11. • Competitive markets are industries where they intensity of
competition between suppliers is high
• There are many key characteristics of competitive markets
1. Many sellers none of whom has a dominant monopoly position
2. Sellers produce slightly differentiated products giving consumers
plenty of choice – leading to a high cross-price elasticity of demand
3. The barriers to entering the market are low, allowing new firms
with new products to come into the market in pursuit of profit
4. Each seller has good access to the prevailing industry technologies
5. Consumer loyalty to established businesses is fairly weak
6. Buyers and sellers have full information about prices so that it easy
for buyers to find the seller offering the best value for money
• The more competitive is a market, the more likely that an
allocatively efficient outcome is achieved
Competitive Markets

12. Contestable Oligopoly – Coffee Stores
• “The UK's love for coffee is booming, with the
number of coffee shops more than doubling in
the last decade. A new report shows there are
now 20,728 outlets across the UK, one for every
3,000 people, up from 8,887 outlets in the UK
ten years ago. The study by Allegra Strategies
also found that three of the largest brands -
Costa, Starbucks and Caffe Nero - have over half
of the market between them.”

13. Location of Costa Coffee Stores in London

14. Competition in UK Coffee Retail Sector
• Costa has become far and away the UK’s leading retail
coffee chain both in terms of outlets and total revenue
733.9
398
200
20 14
0
100
200
300
400
500
600
700
800
Costa Starbucks*Caffè Nero AMT
Coffee
Muffin
Break
Turnoverin£millionin2013
Annual turnover of leading coffee chains
1,552
760
530
429
315
304
104
70
45
35
0 500 1000 1500 2000
Costa
Starbucks
Caffè Nero
SSP*
Wild Bean Café
M&S Café
Coffee Republic
AMT Coffee
Muffin Break
Thorntons Cafés
Number of outlets in 2013Coffee Outlets
Data is for 2013

15. Duopoly – US Energy Drinks Market (2015)
41%
38.9%
8.8%
3.8%
2.6%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Red Bull North
America
Monster
Beverage
Corporation
Rockstar Inc. Monster
Beverage Corp.
PepsiCo Inc.
Marketshare

16. Duopoly – US Confectionery Market 2015
31.3%
29.1%
5.4%
5.4%
5%
3.3%
2.5%
18%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Hershey
Mars
Mondelèz
Lindt/Ghirardelli
Nestlé
Private label
Ferrara
All Other
Market share

17. Digital revenue market share of largest record companies
9.3% 7.3%
15.3% 15.9%
17.1% 17.7%
25.6%
22.7%
20.9%
23.8%
21.1%
21.5%
22.3%
22.3%
28.7% 32.6% 39.7% 36.1%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2011 2012 2013 2014
Marketshare
EMI Warner Music Group Independents
Sony Music Entertainment Universal Music Group

18. What do we mean by market
concentration?
Topic 3.3.8