Less than you might think! For a searcher, the best-laid plans to acquire a business with low customer and market concentration, recurring revenues, healthy margins, and industry tail winds can be easily tossed out the window when you are faced with a business owner who seems very motivated to sell their business and legacy to you!
In order for sellers to exercise market power, either the market will have fairly few selling firms or there will be some selling firms that account for a large portion of all the market sales. When this happens, the market is said to have high seller concentration. Although high seller concentration in itself is not sufficient for exercise of seller power, it is generally a necessary condition and constitutes a potential for the exercise of seller power in the future.
In this section, we will consider two numerical measures of market concentration: Both measures of seller concentration are based on seller market shares The percentage of all sales that are purchased from a particular firm.
Market shares may be based either on the number of units sold or in terms of monetary value of sales. The latter use of monetary value is convenient when Seller concentration are variations in the good or service sold and different prices are charged.
Concentration ratios The sum of the market shares of the firms having the highest market shares in a market; if the value for one firm is above 90, that firm may function as a monopoly. For example, Seller concentration concentration ratio CR4 is the sum of the market shares for the four largest firms in terms of volume in a market and CR8 is the sum of the eight largest firms in terms of volume.
Census Bureau periodically publishes concentration ratios for different industries in the United States. Although concentration ratios are easy to calculate and easily understood, there are two shortcomings.
First, the number of firms in the ratio is arbitrary.
There is no reason that a four-firm concentration ratio indicates concentration potential any better than a three-firm or five-firm concentration ratio. Second, the ratio does not indicate whether there are one or two very large firms that clearly dominate all other firms in market share or the market shares for the firms included in the concentration ratio are about the same.
An alternative concentration measure that avoids these problems is the HHI The sum of the squared individual market shares of all the firms in a market; a value of less than indicates that a market should be reasonably competitive, whereas a value over indicates that the market has a firm that may function like a monopoly.
This index is computed by taking the market shares of all firms in the market, squaring the individual market shares, and finally summing them.
The squaring has the effect of amplifying the larger market shares. For the previous firm example, the HHI would be Although there is no inherent reason for squaring market shares, the HHI includes all firms in the computation avoiding the issue of how many firms to include and reflects the variation in magnitude of market shares.
As far as interpreting these concentration measures, the following statements provide some guidance on the potential for market power by sellers: If CR4 is less than 40 or the HHI is less thanthe market has fairly low concentration and should be reasonably competitive. If CR4 is between 40 and 60 or the HHI is between andthere is a loose oligopoly that probably will not result in significant exercise of market power by sellers.
If CR4 is above 60 or the HHI is abovethen there is a tight oligopoly that has significant potential for exercise of seller power.
If CR1 is above 90 or the HHI is aboveone firm will be a clear leader and may function effectively as a monopoly. Again, a high concentration measure indicates a potential for exploitation of seller power but not proof it will actually happen.
Another important caution about these measures is that the scope of the market needs to be considered. In the case of banking services, even with the mergers that have resulted in higher seller concentration, if you look at measures of bank concentration at the national level, there seems be a loose oligopoly.
However, if you limit the scope to banking in a single city or region, it is very likely that only few banks serve those areas.
There can be modest concentrations when examining national markets but high concentration at the local level.(lower) it’s price as a seller (as a buyer) above (below) competitive levels – characteristic of firms who can restrict entry and possess a high degree of concentration.
Downloadable! Commodity markets may be characterized by concentration on the buyer side, with a small number of transnational intermediary firms purchasing from supplying countries and distributing to the market. In many cases, developing economies may have little choice but to sell through these intermediaries, and recent work has suggested the export taxes may be an optimal policy to.
How do the six-digit North American Industry Classification System (NAICS) and the therapeutic market definition of the pharmaceutical industry differ in terms of seller concentration?
The industry-specific characteristics which have traditionally been hypothesized to influence price-cost margins [Scherer and Ross, ] include the extent of seller concentration, measured as the four-firm concentration ratio, and the small business presence, measured as the number of firms in the industry with between 10 and 50 employees [Prince and Thurik, ].
Freddie Mac Single-Family Seller/Servicer Guide (Guide) Chapter , Special Requirements for Condominiums, and • Project with excessive single investor concentration - project in which an individual or single entity, such as an investor group, partnership or corporation, owns more than the following total number.
The second level of seller concentration is known as industry concentration or market concentration. It measures the proportion of total market supply that is accounted for by the production of a particular group of firms in the industry.