Tuesday, 2 May 2017

Industry Concentration determines the competitive environment in an industry

If an industry is relatively concentrated i.e., a few large firms dominate the industry, there is relatively less price competition.  This is because:

  • It is relatively easy for a few firms to coordinate their activities.
  • Larger firms have more to lose from destructive price behaviour.
  • The fortunes of large firms are more tied to those of the industry as a whole so they are more likely to be wary of the long run impact of a price war on industry economics.

If an industry is relatively fragmented i.e., there is a large number of small firms in the industry, there is relatively high price competition.  this is because of the following reasons:

  • Firms are unable to monitor their competitors' actions, which make coordination difficult.
  • Each firm only has a small share of the market, so a small market share gain (through aggressive pricing) can make a large difference to each firm.
  • Each firm is small relative to the overall market so it tends to think of itself individualistically, rather than as a member of a larger group.

There are important exceptions to the rules defined above.

  • For example, Boeing and Airbus dominate the aircraft manufacturing industry, but competition between the two remains fierce.

No comments: