market concentration


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market concentration

the extent to which the production of a particular good or service is controlled by the leading suppliers (seller concentration), and the extent to which the purchase of a product is controlled by the leading buyers (buyer concentration). The degree of seller concentration in a MARKET is often measured by a concentration ratio which shows the proportion of market sales accounted for by the largest five, or ten, suppliers.

The significance of market concentration for BUSINESS STRATEGY and MARKETING lies in its effect on the nature and intensity of competition. Structurally, as the level of seller concentration in a market progressively increases, ‘competition between the many’ becomes ‘competition between the few’ until, at the extreme, the market is totally monopolized by a single supplier (see MARKET STRUCTURE). In terms of MARKET CONDUCT, as supply becomes concentrated in fewer and fewer hands (OLIGOPOLY), suppliers may seek to avoid mutually, ruinous price competition and channel their main marketing efforts into sales promotion and product innovation, activities which offer a more profitable and effective way of establishing COMPETITIVE ADVANTAGE over rivals.

Buyer concentration can also affect the competitive situation. In many markets (particularly end-consumer markets) buyers are too small to influence supply conditions, but in others (particularly in intermediary goods markets and in retailing), buying power is concentrated and purchasers are able to obtain bulk-buying discounts from suppliers. See ECONOMIES OF SCALE, HORIZONTAL INTEGRATION, COMPETITION POLICY, MONOPOLY.

market concentration

the extent to which the production of a particular good or service is controlled by the leading suppliers (SELLER CONCENTRATION) and the extent to which the purchase of a product is controlled by the leading buyers (BUYER CONCENTRATION). The degree of seller (or buyer) concentration in a MARKET is often measured by a CONCENTRATION RATIO, which shows the proportion of market sales (or purchases) accounted for by the largest five, or 10, suppliers (or buyers). See CONCENTRATION MEASURES for further discussion.

An increase in the level of market concentration can come about through the differential rates of ORGANIC GROWTH of firms, with the more successful firms increasing their market shares at the expense of weaker rivals. Alternatively, greater market concentration may occur as a result of the EXTERNAL GROWTH of firms through mergers between, and takeovers of, competing suppliers. See RESOURCE-BASED THEORY OF THE FIRM.

The significance of market concentration for market analysis lies in its effect on the nature and intensity of competition. Structurally, as the level of seller concentration in a market progressively increases, ‘competition between the many’ becomes ‘competition between the few’ until, at the extreme, the market is totally monopolized by a single supplier (see MARKET STRUCTURE). In terms of MARKET CONDUCT, as supply becomes concentrated in fewer and fewer hands (OLIGOPOLY), suppliers may seek to avoid mutually ruinous price competition and channel their main marketing efforts into sales promotion and product innovation, activities that offer a more profitable and effective way of establishing COMPETITIVE ADVANTAGE over rivals.

Buyer concentration can also affect the competitive situation. In many markets (particularly end-consumer markets) buyers are too small to influence supply conditions, but in others (particularly in intermediary goods markets and in retailing), buying power is concentrated and purchasers are able to obtain BULK-BUYING discounts from suppliers. See ECONOMIES OF SCALE, HORIZONTAL INTEGRATION, COMPETITION POLICY, MONOPOLY, FIRM GROWTH.