Industry concentration refers to the extent to which a particular market is dominated by a few major players. It is a term used in economics to describe the level of competition within an industry. The higher the concentration, the less competitive the industry is likely to be. In this post, we will explore what industry concentration is, how it affects businesses and consumers, and how it can be measured.
Industry concentration can be defined as the degree of dominance of a few firms over others in a particular market. It is usually measured by the Market Concentration Ratio (MCR) which calculates the market share held by the top N firms in that industry.
In industries with high concentration, dominant firms have more bargaining power over suppliers and customers. Smaller firms may find it difficult to compete with established players as they face higher barriers to entry. This can lead to reduced innovation and a lack of diversity within the industry.
High levels of industry concentration can lead to less choice for consumers as dominant firms may limit product offerings or set high prices due to lack of competition. Consumers may also face reduced quality as firms prioritize profits over quality.
Market Concentration Ratio (MCR) is used as a measure of industry concentration. It calculates the total market share held by top N firms in an industry. MCR can be calculated using various methods such as CR4 (top 4 firms) or CR8 (top 8 firms).
Industry Life Cycle plays a vital role in determining Industry Concentration rate. Competitive Intelligence, SWOT Analysis and Porter's Five Forces Analysis are other major factors influencing Industry Concentration rate.
A high level of industry concentration can impact competition which can have significant implications for businesses and consumers. Understanding industry concentration can help firms make strategic decisions about market entry, pricing, and product offerings.
Breaking up large firms, promoting competition and innovation, lowering barriers to entry, encouraging new entrants are some of the steps that can be taken to reduce Industry Concentration rate.
Industry Concentration is a crucial element to consider while analyzing industry trends. Measuring Industry Concentration using Market Concentration Ratio and studying factors like Industry Life Cycle, Competitive Intelligence, SWOT Analysis and Porter's Five Forces Analysis can help companies make informed business decisions.
