Competition is an enduring and pervasive fact of business life. Although the
intensity of
competitive pressure varies according to type of industry and stage of
the business
cycle, most managers recognise a broad similarity between their own
experience
and many aspects of the competitive model of the previous chapter.
High profits
attract new entrants; losses lead to exits. Prices cannot be realistically
altered without
regard to the ‘market’ rate, and so on.
Yet one important aspect of business
reality is market power. Up to now, we
have assumed
that firms have negligible market power. Each firm is so small in
relation to
the total size of the market that it takes the going market price as
‘given’ and
can safely ignore other firms’ reactions to its sales or price decisions.
There are
too many producers to make any such interdependence
worth
considering. This assumption is now relaxed. Firms are allowed to
have monopoly,
or market, power.
The way firms use, and maintain, market
power is the subject of this chapter.
Firm size
‘Corporate giantism’ is a feature of many
parts of the economy. In the automobile,
aircraft and
oil industries, large scale is the norm rather than the exception.
The top four
meat-packing firms in North America slaughter
84 per cent of
US cattle.
Wal-Mart employs over one million people – a workforce more than
half the
size of the total working population of a small country such as Ireland
and held
over 60 per cent of the retail discount trade of the US
household
names, as have the state-owned communications and transport companies.
At the opposite end of the spectrum are the
small and medium-sized enterprises
,defined as
enterprises employing fewer than 250 persons. In 2000, there
were 19
million such enterprises in Europe-19 (the EU countries, Iceland
of the total
number of enterprises, the 40,000 enterprises with 250 or
more
employees accounted for 34 per cent of the EU’s workforce in services and
industry of
122 million._1 Enterprises employing fewer than 10 persons employ 42
million or just over one-third of the total. Micro-firms are heavily
represented in retail distribution, construction and personal services
Almost half of all US
account for
46 per cent of private sector employment._2 The vast majority of US
firms had
sales below $10 million per year.
Firm size, concentration ratios and market power
Some rough indication of the proportionate
strength of competitive forces in the
economy can
be gleaned from examining the proportion of small relative to large
firms in an
economy. Suppose one starts with the assumption that sectors with
large
numbers of small enterprises are more likely to have the characteristics of a
competitive
market than sectors dominated by the larger enterprises. On this
basis, since
66 per cent of the EU workforce is employed in SMEs, we could infer
that 66 per
cent of total marketed activity approximates the conditions of
the
competitive market and the remaining 34 per cent could be classified as
monopolistic.
This is a crude indicator, however, since, as we have seen, on the
one hand
large firms are not incompatible with competition and on the other the
prevalence
of small firms does not guarantee competition.
Another approach is to focus on
concentration ratios. Concentration ratios are a
commonly
used measure of the degree of market power at industry level. These
ratios
measure the percentage share of industry sales, or employment, accounted
for by the
largest companies. A C4 of 70 per cent, for example, indicates that the
largest four
firms account for 70 per cent of industry sales. A C10 of 85 per cent
indicates
that the 10 leading companies account for 85 per cent of industry
output. The
concentration ratio is a widely used measure of the degree of market
power in an
industry._3 Typical illustrations of information expressed in this way:
six firms accounted for 80 per cent of worldwide music sales in the mid-1990s,
while one firm accounts for 40 per cent of the global tea distribution market.
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