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Concentration and Oligopoly

In any industry, two types of concentration can be distinguished: sellers (or the market) and production.

Market concentration is the degree to which one or several firms dominate the market.

In relation to market processes, concentration is the concentration of production or sales in a small number of business entities. For example, the highest possible level of concentration is a sign of monopoly. Conversely, a low degree of concentration characterizes such a type of market structure as perfect competition.

To quantify market concentration, three indicators are used:

? the number of sellers operating in the market;

? market share of sellers (Di);

? market concentration ratios (CR) and market index

Herfindahl-Hirschman concentrations (HHI)

The share of sellers in the market is calculated by the formula:

D = VIV t • 100, where: Vi- sales volume of goods i –m seller;

Vt is the volume of sales of goods on the market.

The dominant position is the position of an economic entity, whose market share is 65% or more. If the share of an economic entity does not exceed 35%, then its position is not considered dominant and it does not have market power.

The market concentration coefficient is calculated as a percentage of sales (supply) of products by a certain number of largest sellers to the total volume of sales (supply) in this product market. In domestic practice, the concentration coefficients of the three (CR-3), four (CR-4), six (CR-6), eight (CR-8), ten (CR-10), or twenty-five (CR-25) largest ones are usually calculated sellers (manufacturers, suppliers).

Industries in which the four largest firms account for

59 and more percent of industry output are considered highly concentrated. They are characterized by a situation of a strong oligopoly - a clear dominance in the market of several leading firms.

The Herfindahl-Hirschmann Market Concentration Index (HHI) shows the influence of large companies on the state of the market and is calculated as the sum of the squares of the shares of all business entities operating in the market (industry):



? Di 2

I = 1


Di - the share of the i-th business entity in the volume of products sold on the market (in the industry),%;

n is the number of economic entities operating in the market.

The value of HHI varies from 0 (full deconcentration) to 10,000 (absolute monopoly - 100% of the market).

A characteristic feature of the oligopolistic market is the dependence of the behavior of each company on the reaction and behavior of competitors.
The large size and significant capital of firms are extremely mobile in the market, and in

Under these conditions, it is the collusion between oligopolistic firms that promises the greatest benefits in order to maintain prices and maximize profits. Manufacturers agree on cooperation and conclude (sometimes open and even formalized) an agreement on the division of the market - a “cartel agreement”. A cartel is an agreement of several enterprises that establishes for all participants the volume of production, prices for goods, terms of employment, patent exchanges, delimitation of sales markets and the share of each participant in the total volume of production and sales. Its purpose is to increase prices (above the competitive level), but not to limit the participants' production and supply and marketing activities.

A cartel rarely, unlike a monopoly, controls the entire market,


? forced to take into account the policies of non-cartelized enterprises

? there is great competition among cartel participants, manifested in the attempts of one of the participants to capture a large market share by lowering prices or actively advertising their product.

A classic example of the formation and existence of a cartel agreement so far is, for example, the Organization of Petroleum Exporting Countries (ORES), which in different periods of its history controlled from 25% to 60% of oil production.

The inability to fully and constantly use the cartel for

the interaction of oligopolistic firms forces them to agree to tacit economic agreements, a secret economic policy in the field of changing prices and delimiting spheres of influence. Such cooperation can be manifested both through the special economic policies of oligopolistic firms in the form of “price rigidity” or “leadership in pricing”, and through special organizations such as “patent pools” (or consortia).

Oligopoly is significantly different from monopoly. Its essence is the fusion of coordination and competition. At the same time, a general rule applies: the fewer firms in the industry and the larger each of them, the easier it is for them to coordinate their actions and achieve the highest possible profits by adjusting prices for manufactured products.
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Concentration and Oligopoly

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