Market Structures and Concentration Measuring Techniques

Home , Concentration ratio, Market concentration

Asian Journal of Agricultural Extension, Economics & Sociology

19(4): 1-16, 2017; Article no.AJAEES.36066 ISSN: 2320-7027

Ismail Ukav1*

1Department of Accounting and Tax, Adiyaman University, Adıyaman, Turkey.

Author’s contribution

The sole author designed, analyzed and interpreted and prepared the manuscript.

Article Information

DOI: 10.9734/AJAEES/2017/36066 Editor(s): (1) Md. Moyazzem Hossain, Department of Statistics, Jahangirnagar University, Bangladesh. Reviewers: (1) Achille Dargaud Fofack, Cyprus International University, Turkey. (2) Poornima Duvoor, Jawaharlal Nehru Technological University, India. (3) John Walsh, Shinawatra University, Thailand. Complete Peer review History: http://www.sciencedomain.org/review-history/21063

Received 11th August 2017 th Method Article Accepted 15 September 2017 Published 20th September 2017

ABSTRACT

The aim of this study is to determine the characteristics of the market structures and methods of measuring the concentration which are the most important issues of economics in recent period. Knowing the market structure and setting the level of competition is important for the policy to be followed for decision makers. In determining market structures, there are many concentration criteria such as concentration ratios, HHI, Lorenz curve, Gini coefficient, Rosenbluth index, entropy index, Linda index, Horwath index, Lerner index. The most widely used are the Company Concentration Rate (CRn) and the Herfindahl - Hirschman Index (HII). While presenting concentration criteria theoretically, it has benefited from various sources related to the subject. Concentration rate is the most common and widely used method because of its simplicity and ease of calculation. Concentration is the control of several indicators (production, sales, etc.) in a sector by few companies. The Herfindahl-Hirschman Index takes into account all firms in the sector and shows sensitivity to firm size. With concentration measurement techniques, it can be determined which of the competitive markets are in the scope of perfect competition. So, the results that are obtained can be a guide as the aspect of using the source efficiently and create the competition.

Keywords: Market structure; competition; concentration methods; concentration rate; Herfindahl- Hirschman index.

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*Corresponding author: E-mail: [email protected]; #This paper is based on chapter 5 of my PhD thesis at the Çukurova University of Economics Agricultural.

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1. INTRODUCTION monopoly and if they are making various technological improvements besides lowering Today, the various activities of the firms cause their profits nevertheless the consumers don’t the markets to move away from the full experience welfare loss [5]. According to the competitive structure and to form the fierce competitive market paradigm developed by competition markets (monopoly, monopoly Baumol, Panzar and Willig [6], the fundamental competition, oligopoly markets). The purpose of of monopolistic power is a barrier to the process these activities is to increase their market share, of entry and exit from market contrary to to reduce their costs, to increase their income, concentration and economies of scale. In other and hence their profits. To achieve this, it is words, firms, which are small in numbers, necessary to go to differentiation of goods, to operating in the industry, or the presence of establish economies of scale, to make large-scale companies in the industry does not agreements between firms, to apply various mean that industry performance is absolutely low marketing techniques (especially advertising [7]. activities) [1]. Market concentration indices provide useful and In the theory of economics, if the conditions of practical indicators of market power. Because perfect competition in the market are valid, the these indices are market-based values, they are most desired goods and services are produced much more useful when a firm's power in the by the firms with minimum cost and the market is determined along with other data. resources are used in the most effective way. For Market concentration indices are easy to this reason, since companies also earn normal calculate and give clues about how competitive profits, consumers are able to purchase goods the market is. The concentration diminishes and and services they desire at a minimum price. In the competition increases within the ratio of the this respect, perfect competition market is multitude of firms operating in the market and in considered as the most effective market structure terms of equivalence of these companies. To the [2]. However, in sectors where there is a lack of extent that market structure is competitive, the competition and a high concentration ratio, a power of firms operating in the market to disproportionate price system and misallocation influence market variables diminishes. For this of resources cause consumers to suffer damage reason, it is important to know the market [3]. concentration rates in determining how competitive the market is [3].

When examining today's market formations, There have been efforts to develop a criterion monopolistic competition and oligopoly market putting forth the market structure since 1950s. structures appear to be predominantly located The aim of this effort is to reveal all the relevant between the perfect competition market and the characteristics of a variable market structure. monopoly market. The most commonly used The purpose of the analysis of the market methods in determining the market structures are structure is to demonstrate that market structures the N-Firm Concentration Rate and the that are theoretically explained in the relevant Herfindahl-Hirschman Index in the context of the sector show closer characteristics, such as Structure-Conduct-Performance (SCP) approach perfect competition, monopoly, monopolistic [1]. In industrial economics studies, the competition, oligopoly or other markets. The relationship between market structure and determination of the characteristics of the market performance in the sector is generally structure is as important as microeconomic as considered. The key concepts here are structure, well as production and application of conduct, and performance (SCP) that help macroeconomic policies [8]. In addition, the predict industry performance. Al-Obaidan [4], ineffectiveness of the markets and the risks it notes that the Paradigm of Building Behavior and poses can cause the social welfare to be Performance supports a direct relationship adversely affected. For example, concentration between market concentration and competition can lead to higher profits [9]. Therefore, the level. According to the market efficiency relationship between market structure and paradigm, which is an alternative to the structure, concentration in a sector is important. It is behavior, and performance paradigm, it is stated becoming a necessity to know the concentration that competition is a process and that rates especially in the control of the markets. monopolization alone does not cause negative results. According to this paradigm, firms should As it is known, the concentration, with its most not be considered as negativity when they are in general meaning, is the distribution of sales

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volume and number of the firms that are in buyer using the methods of concentration and dealer markets. Therefore, the main debate measurement, are given below. in the framework of creating concentration criterion is the following: Kambhampati [13], examined the concentration of India's 33 industries in the period 1974-1985. 1) Choosing of the measure to be used According to the study, concentration is growing 2) To decide whether all or some of the firms, faster than the one in the Western countries in a specific market, will be indexed. besides it is below 50%. It was determined that 3) The meaning and appropriateness of the the concentration ratio is high in sectors with high distribution of firms' sizes within the dividends. criteria. The power to influence the concentration of variables to be used has Symeonidis [14], examined the development of been the subject of various investigations. condensation using panel data set of four- digit Examples of these studies are barriers to after the removal of the cards from the UK entry [10,11] and economies of scale [12]. manufacturing industry. Accordingly, the econometric results suggest that the intensity of The Herfindahl-Hirschman Index (HHI) is another price competition has a positive effect on important index used to measure concentration concentration in exogenous sunk cost industries in a market. The shares of all companies in the as well as in advertising-intensive and R&D- sector are taken into account. When the index is intensive industries. calculated, first of all the square of the market shares of each company in the market is taken. Pan [15], using metropolitan panel data in Then, the sums of these squares are taken. Taiwan, examined how various relevant service When there are many companies of similar size markets and locations of hotels influence the in the market, the index value approaches 0. In profitability of hotels. Pan revealed that this case, it is said that the market is approaching concentration in the hotel market could perfect competition. As the number of firms significantly increase the profitability at increases in the market, the value of HHI also international tourist venues and that the market grows. If there is only one firm in the market, ie if concentration in the food and beverage markets the monopoly market is valid, the HHI value will had a positive but negligible effect on the be 10,000. HHI values between 1000 and 1800 profitability in the international tourist venues. are considered acceptable limits. Sectors where the concentration is high in the United States are Staikouras and Fillipaki [16] measured the level not permitted by laws against merger and of concentration and competition in the European acquisition monopoly, which would increase the Union (EU) banking system during 1998-2002. index value by more than 100 points [8]. Panzar and Rosse methodology was applied in

Many of the studies conducted for the the study and European banks were found to concentration methods in the literature have operate under monopolistic conditions. been held in developed countries. These studies have emerged as a result of the accumulation- Cetorelli et al. [17], found that policy makers and related factors and consequences of examining market players were very interested in the link the functioning of the economic order in these between financial market concentration and countries and determining the dimensions of stability, that the majority of the US wholesale public policy. In addition, these firms have to credit and capital markets concentrated explain the data required for concentration modestly, and that concentration trends measurement to all companies, which makes decreased in some markets during the upswing. market structure research relatively easy. Since there are no such facilities for reaching out in Tung et al. [18], analyzed the international Turkey, studies on determining the market tourism industry in Taiwan according to market structure and concentration are difficult, so such share, advertising and, profitability indicators. studies are of great importance. According to this, It has been determined that the brand has a positive effect on the market share 2. LITERATURE REVIEW and that the profitability of the company has been affected positively and significantly by the market Some studies in the world and Turkey, which share while it has been adversely affected by the reveal the market structures of various sectors total operating costs and the capital concentration.

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Mirzaei et al. [19], examined 40 emerging and Concentration measurement should have developed economies in 1999-2008, combining following features [23]. traditional structure-conduct performance (SCP) and relative market-power (RMP) hypotheses. It - The concentration must be a one- has been observed that the higher bank dimensional criterion. For example, if two profitability hypothesis has been confirmed with a industrials are the subjects, either one of larger market share in developed economies, but them will be more concentrated than the no hypothesis in developing economies supports other or less concentrated. Besides, their profitability. concentration degrees will be equal. In other words, the concentration measurement isn’t Sarıbaş and Tekiner [20], investigated the uncertain. concentration level and level of competition of - The concentration in an industry is the Turkish Civil Aviation Industry for the period independent of that industry’s size. If the 2011-2013 and used the N-Firm concentration market share of ith firm in an industry is Pi, ratio and Herfindahl-Hirschman indices as a the concentration is a function of Pi. In other method. As a result of the research, it is words, proportional significance of a firm is determined that the concentration rate of Turkish determined by its proportional share in the civil aviation industry is very high and the level of industry. competition is close to the oligopoly market. In - A concentration measurement must be the calculation made by excluding THY (Turkish sensitive against the changes in firm shares. Airlines) firm, a low degree of concentration was For example, if the share of any firm determined and the result is that the degree of increases against a small firm, the high concentration is mostly caused by the size concentration must increase, as well. of THY's market share. - If all firms are divided into K equal parts, the concentration index will decrease by 1 / Kaynak [21], analyzed the level of concentration K. in the Turkish clothing sector using the - If an industry has N firms of equal size, the CRn (CR4 and CR8), Herfindahl-Hirschman and concentration measure N must be a Entropy Indexes among the concentration decreasing function. criteria. In the analysis covering the years 1995- - A concentration measurement must take 2014, the concentration according to CR4was values between 0 and 1. revealed high in some periods and low in some periods. In the CR8 analysis, the concentration Concentration measurements can be examined rate was steadily high except for 2002 and 2003, by dividing them into two divisions. These are especially the global economic crisis caused the partial indexes and summary (aggregate) sector to move away from the competitive indexes [24]. While partial concentration indexes structure. According to the HHI analysis result, take into account only some of the firms in the the concentration level of the firms operating in market, summary indexes take account all of the the clothing sector was between 468 and 1357, firms in the market. Typically, summary indexes, while the low concentration level was valid until too, stress the importance of marginal firms. Both 2008, whereas after 2008, there was a medium the dispersion of the firm’s volumes and the level concentration. number of the firms in a specific market affect the firms’ conduct and performance in that market. Auer and Schoenle [22], made an analysis of Each concentration index bears a torch on firms’ how firm-level market shares and pricing numbers and important aspects of size behaviors affect transit decisions and noted that distribution. That’s why; the choosing of the market structure failed to explain methods of concentration index ought to be directive influencing price adjustments at industry according to measurement requirements as well balances. as feature of the situation.

3. CONCEPTUAL FRAMEWORK OF 3.1 Concentration Measuring Methods CONCENTRATION 3.1.1 Partial indexes It is necessary to mention that some features of concentration measurement before the Partial index is the most commonly used and concentration measuring techniques. debated of the entire concentration measurements. Partial indexes, typically, shows

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the percentage of the market value of a good (or called according to firm numbers. For instance, other variable units), which firms (for example the four-firm concentration rate CR4  ; eight-firm largest 4, 8, 20 and 50 firms) in the subjected market sell in the market. concentration rate CR8  ; twenty-firm

concentration rate CR20  . So, it is possible to The distinguishing characteristic of a partial index is based on only a fraction of the total number of compare among the industries. firms in a given market. The concentration rates that bases on some large firms and shows the Since most countries publish four and eight percentage (rate) of total volume of a specific firmed concentration rates, these rates have market are commonly used in industrial become the most common used criterion. That’s organization researches as an indicator of why; these rates are used basically as the competition level and a representative of indicator of monopolistic power. For example, technological changing criterion. Partial indexes CR4 specifies 4-firmed concentration rate. It is split into two as concentration rates and the sum of market shares of the four largest concentration curves. firms. If market shares of four firms in a specific industry are 15%, 12%, %6 and 4%, the 3.1.1.1 Concentration rate concentration rate for this industry is 0.37.

It is the most common and the oldest among the (0.15+0.12+0.06+0.04=0.37) all concentration measurements. It is defined as “ n ” number of the firm’s cumulative share. It is Concentration rate is a highly used criterion, based on the aggregate value ratios realized by because its calculation is easy and some the companies in terms of the criteria of the first " countries’ statistics give this figure directly. This n " firms, which are listed on the basis of various rate only gives information about one point on sizes such as production, assets, sales, capacity, the concentration curve. If the monopolistic employment, value added. In other words, power, which exists, is intended to be measured concentration rate shows the share of some big instead of giving importance to development of firms in the industry. Each firm’s share is found the firms’ size distribution in the analysis, this via following formula. criterion can be considered enough. Nevertheless, it should be mentioned that this measure has some deficits. Two problems Xi Pi  (1) emerge right here [25]. The first problem is how T many firms will be picked when we say few firms; the other one is the big firms, which are th Pi : the market share of i firm i1,..., n determined, will be picked within the same group th or different group. Xi : the sales of i firm (or the other

variables) When we say “firms in small numbers”, it T : total sales of the sector(or the other generally means 4, 8, 20 and 50. While the variables) concentration rates are calculated, whole firm The market share (concentration ratio) of a size distributions; therefore, number of firms isn’t sensitive to changes. This rate doesn’t reflect the certain number of firms is calculated as follows. changes among the low-rate firms in “ n ” after a n specific “ n ” is picked. (2) CR n   Pi i1 The question of whether the firms in small numbers will be picked from the same group or from the changing group is up to researcher’s CRn : Concentration rate for n firms. choice. The firms that enter the largest group can n : Number of large firms in the industry th vary in time. If the change in the firms’ structure Pi : the market share of i firm i1,..., n in time is intended to be seen, the firms that were covered in the beginning should be covered in These figures, which are mentioned as later periods, as well. As to second issue, only percentages and determined according to the change in the structure of industry can be specific firm numbers, are called as observed. concentration rate. Generally, these rates are

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Measurement methods’ having dynamic features by four or fewer firms. The competition market is bring more sound comments. that the whole supply is met by many companies [27]. The fact that the measurement methods are dynamic features brings more sound On the evaluation made by the TSI (Turkish interpretations. Suppose, for example, that the Statistical Institute), Concentration Grades CR4  shares of 8 firms in industry ( M ) are as follows (Table 1). in Turkish Manufacturing Industry; it is studied in four parts: from 0 to 30 at low level (competition As can be understood from the table, the 4- exists), from 31 to 50 at medium level, from 51 to company concentration ratio in year z is 75%. A, 70 at high level, and very high level of B, C, D firms constitute the largest 4 firms in this concentration from 71 to 100 [28]. industry. However, despite the fact that the 4- company concentration ratio has not changed in As concentration rates are frequently used in the the past 5 years, the first four firms have lost analysis of industrial markets, it is important to their place and proportional company shares identify potential weaknesses. The most obvious have changed. If this industry branch had been ones are [24]: evaluated only by looking that 4-firm concentration ratio in every two years didn’t - The concentration rate based on the change, it would have been an unsound Standard Industrial Classification (SIC) interpretation. This is because changing the system may not accurately reflect economic proportional shares of the firms reveals that there markets. is a certain competition in this industry. - Concentration rates do not reflect whether the competitors have potential market entry Table 1. Distribution of market share of ( M ) requests. companies in industry - Concentration ratios are based on national figures and therefore the regional market Firms Year Z (% ) Year Z + 5(%) does not consider the strength or regional Firm A 24 6 concentration. Firm B 21 6 - Concentration rates cannot account for the Firm C 17 9 number and size distribution of all firms, but Firm D 13 9 only some of them. Firm E 9 13 - Concentration rates do not take into Firm F 9 17 account the role of imports in domestic Firm G 6 21 markets. Firm H 6 24 - Concentration rates do not take into account the export values of domestic Another problem encountered in the method of producers. concentration ratio arises as to what level of this - Concentration rates do not give information ratio is to be assumed to exceed the about the volume and position of the firm concentration threshold. Some researchers have groups within a ratio. taken the starting point for concentration to a - Concentration rates fail to reflect "cycles" level of 50-55% in their analysis based on a 4- (changes in the positions and limits of certain firm concentration ratio. Scherer has identified firms). oligopoly as the industrial sector with a - Concentration ratios are structural concentration ratio of more than 40%, and indications that explain the number and size monopoly markets those with a high distribution of certain parts of a firm in a concentration ratio [26]. market; they do not have to cover certain types of behavior through the companies in According to Bağrıaçık’s classification, the that market. absolute monopoly is that a single firm provides all the goods; while the partial monopoly has a Even if you are confronted with these share of 50% or more of the single largest firm, weaknesses, it is not inconvenient to use the rest of the market is shared by a large concentration ratios. One of the reasons for this number of firms. Similarly, the absolute oligopoly is that it provides important information in terms is defined as a situation where all goods are of both the intensity of competition in the sector received by five or fewer firms, while a partial and the ease of entry into the industry (or oligopoly is where 50% of the market is satisfied strength). The concentration set here is an

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important indicator of market behavior and superiority over partial indexes is to take account market outcomes. of all firms on the market. The problems that define the market in a proper way are the same Second, concentration rates are a simple and as the indexes and concentration rates. Indexes easy-to-understand indication of a particular use information more than concentration rates. segment of a market. For example, when the 4- The main difference of the indexes is that it firm concentration ratio for the aquatic products brings together the data belonging to the small industry is 94, this statistic shows that the 4 firm in the market. Some summary indexes are largest firms have achieved 94% of the total given below. sales value of the aquatic products. 3.1.2.1 Herfindahl-Hirschman Index (HHI) The third and perhaps the most important is to publish statistics on concentration ratios, while It is the most commonly used method after there are no alternative data sets for concentration ratio. It is also known as the manufacturing industries detailing other aspects Herfindahl-Hirschman Index (HHI), as mentioned of the market structure. For this reason, in the method section. HHI is a measure of the concentration rates are one of the most distribution ranging from 0 to 1. This index is the frequently used indicators to determine overall sum of the squares of the relevant company market structure. Concentration rates are a shares which is determined as a ratio valuable helper in the analysis of the industrial (percentage) of the total volume of the market organization, even though they are used with and is calculated according to the following prudence. formula:

3.1.1.2 Concentration curve N 2 HHI   Pi The concentration curve is a curve drawn in a i1 two-dimensional system formed by the n 2 2 2 2 2 (3) percentages of firms with an axis number of (HHI   Pi  P1  P2  P3  ...  Pn ) cumulative firms, the other axis being the one of i1 the indicators such as production, employment, : Total number of firms in the industry sum of assets, sales, and value added, capacity : the market share of ith firm ( = 1, 2, ) [25]. The important thing here is to rank the firms from the greatest one. Thus, it is possible to If there are an equal number of “N” companies in obtain the concentration ratios from the the industry, the index falls to the smallest value concentration curve. For example, as seen in of 1 / N [29]. For this reason, the index is a Fig. 1., if the market share of the first four firms is function of the inverse of the number of firms. to be seen, the concentration of the four firms will be given by the four firms and the place where N the downtrend cuts the concentration curve. = (1⁄ ))² (4)  i 1 For example, if the vertical axis indicator is taken as the sales quantities of the firms, it is seen that = (1⁄)(3) 4 firms account for 10% of sales in this industry, = ⁄(4) according to the concentration curve indicated by CC1, which represents any industrial sector. If there is only one company in the industry, the According to the concentration curve indicated by index reaches the highest value of 1. The HHI CC2 belonging to another industry, 40% of the considers firm distributions as being different sales are provided by 4 companies. Thus, it is from the concentration ratio. But since the also possible to make a comparison between the squares of the shares are taken, the contribution industries by determining the concentration to the index value of small firms will be low. curves on a common basis defined by the same indicator. In other words, the HHI takes into account all the companies in the sector and weighs firms with 3.1.2 Summary indexes proportional market shares. As the company shares become smaller, they participate in the Summary indexes give results by transforming lesser evaluation. The index reaches its highest the data in different ways on the same basis. Its value in the monopoly situation and the smallest

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value is that all firms have equal shares. When if the real sales volume of the firms between firm the number of firms with equal volumes is large, G and J is known, when it is accepted that the HHl approximates 0, when it is a single company; rest of whole market shares of these firms are it takes the value 1, which is, as the index value cumulated in one single firm. Thus, by using approaches one, the concentration increases. If these techniques, it is possible to obtain close the HHI Index takes a value between 0

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Fig. 1. Concentration curves (CC)

Fig. 2. Lorenz Curve

When new incomes and outcomes occur in the largely. The interpretation according to drawing market, the Lorenz curve will reflect this situation may be unsound because of this. as if the concentration has changed in the industry even though some large firms’ shares 3.1.2.3 Gini coefficient don’t change. But it will not be affected by changes in the number of firms of equal size. The Gini coefficient, which can be calculated Another important point in detecting the Lorenz from the Lorenz curve, is used to measure the curve is that the number of firms in the industry is magnitude of the area between the Lorenz curve precisely determined and thenit is based on the and the absolute equation line. This area reflects drawing. Numerous small firms that are the proportional effect of the firm’s size and considered as marginal and are not taken control share. So, the area becomes larger, the account may affect the shape of the curve effect increases. The absolute equality line splits

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the unit square in two equal pieces. The area of of firms in the industry are scaled by places in each triangle can be identified as 0,5. The area the size order. According to this, between Lorenz curve and absolute equality line is called as “inequality area”. Gini coefficient is 1 calculated as; = = 1, . . . , , . . . (5)  n x  2 ( i ) 1 = / 0,5   x   i1 

In other words, Gini coefficient for an X market is = 1. = 1, obtained by dividing the combed area to the whole area of OCD triangle (Fig. 2.). As it is seen th :the sales of i firm here, the closer this coefficient is to zero, the closer the industry is to the conditions of the :total sales of the sector competition market. Gini coefficient’s getting close to 1 shows the industry is approaching to :the number of the large firms in the the monopoly market. Since, when the G = 1, the industry inequality area will overlap with the area that absolute equality line determines. Here, the shares of the companies are weighted

with the rank values. This index measures the This situation means that a single firm has the area over the concentration curve. It is whole market and controls it. Gini coefficient, as suggested that this index is more sensitive to other concentration criterions, has both changes in firms' size distribution. The index advantages and disadvantages. Assumed that takes values between 0 and 1. As the value the structure of a particular industry branch and approaches 1, the market approaches monopoly. the firms that make up the industry branch are known. After a while, when there are mergers 3.1.2.5 Entropy index between medium or small sized companies, the concentration ratio calculated based on the The Entropy Index () is an approach that largest three or four firms will not be changed. involves identifying and evaluating the properties But this change can be seen by using the Lorenz of a system, such as eligibility, irregularity, and curve or the Gini coefficient. uncertainty. Its use in economic theory has also

been adopted in relation to the competition In addition to these advantages, the Gini market, because the more unclear the coefficient has two major disadvantages. This competition conditions, the greater the coefficient will give unfavorable results when uncertainty of the environment, the more difficult there are few similar firms in an industry. The it will be for consumers to make choices, and the Gini coefficient for the triopolistic (triple firm) or more systematic the system will be. The Entropy duopolistic (dual firm) market, which is composed Index assesses whether there is a departure of companies with equal market share, will be from the competitive market conditions in an zero. However, it cannot be said that monopoly industry, in a similar way to the Herfindahl Index. market cannot be mentioned in such cases. However, it resolves the deficiency that may

occur because of taking squares of the firm Second, as already mentioned, the Lorenz curve shares in H index (since the squares of the and the Gini coefficient are very sensitive to the market shares are taken, the proportional mistakes that can be made in determining the differences between firm sizes may be somewhat numbers of firms in the industry. For this reason, different) and the error, as well. For this, a detailed information about the size and number correction is made by taking the log of the of firms in each industry sector is required. It is inverse of the firm share ( ). So, often difficult to reach such information.

∑ ( ) 3.1.2.4 Rosenbluth index = . log 1/ (6)

The Herfindahl index was not ideal because it As you can see, the Entropy value () will be only weighted proportional quantities and a new between 0 and log n (the logarithmic value of the index was developed. In the Rosenbluth index number of companies in the industry). Near-zero (RHT), which was found by Rosenbluth and values will be interpreted as the absence of examined by Hall and Tideman [31], the shares entropy in the system of closeness (high

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concentration) to monopoly and oligopoly N markets. The opposite will be true as the number = +  (1 + (1 − )) = 1 grows. Likewise, as the inequality between j2 firms' market shares increases, the value of and = 2, . . . , (12) will decrease. When the market shares of the companies are equal ( = 1/) , is the This index consists of the weighted sum of the maximum. In this case, the value of is largest firm () market share () and the market calculated using the following equation: shares of other firms () . To facilitate understanding of this index, an example can be n given from an earlier work. In 1969, there were E=  (1⁄)log (1/(1/)) (7) five private firms in the industrial sub sector of i 1 the Turkish Manufacturing Industry. Their market shares according to their employment values n were 0.344, 0.317, 0.279, 0.057 and 0.002 E= (1⁄) (8)  respectively [25]. From here, i 1

CCI = 0,344 + ((0,317)) (1+ (1-0.317)) + = (1⁄) + (1⁄) + ⋯ + (1⁄) (9) ((0,279) (1+ (1-0.279)) + ((0,057) (1+ (1-

0.57)) + ((0,002 ) (1+ (1-0.002)) = 0.654008. = (⁄) (10)

CCI is a measure giving the absolute and = (11) proportional concentration at the same time. This

index, too, handles the biggest firms together The entropy index has the same properties as with their values and increases the difference the HHI does. It takes into account the whole of between these two groups much more. the distribution and it is sensitive to changes in the number and size of firms. Thus, in terms of 3.1.2.8 Lerner index its use as a measure of business concentration, higher weights are given to smaller firms. Note The Lerner index measures how much the sales also that decreasing values of indicate price is above of the marginal cost in a firm or increasing levels of concentration [32]. industry sector. In other words, it tries to

determine the magnitude of the difference 3.1.2.6 Linda index between the selling price and the marginal cost

in the firm or industry. An interest is established One of the measures developed to measure the between this difference and concentration. The degree of inequality in an industry is the Linda higher the marginal cost () of an industry or index [33]. the price () determined by a firm, the more

1 − 1 − concentrated the industry is, the more profitable = × it will be. The Lerner index tries to measure the ( − 1) = 1 − dimensions of such a relationship. The Lerner index is calculated as follows. Where: m – is number of firms for which the index is calculated, – concentration = ( − ) / coefficient for the first firms ( = 1, … , – 1). = ( − ) / The index is based on the distribution of the largest firms, not the entire distribution within the As can be understood, the value of L can be sector, as it aims to measure the oligopolistic between 0 and K with an ambiguous number. It structure of the industry. The companies that are can be said that the closer the index value (L) is given examples should cover 2/3 of the related to 0, the closer competitive market conditions size change values. are. However, in order for the index to be calculated and interpreted, the market for the 3.1.2.7 Horwath index application must be in equilibrium with maximization of profit. In the absence of MC = It is a comprehensive concentration measure MR, the application and interpretation of this consisting of the combination of partial and index will not yield healthy results. It can also be cumulative indices (concentration ratio and H said that this index leads to a subjective index) and calculated as evaluation due to the use of data for firm

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performance. It is also very difficult to find the competitive market, it can be said that there is data required for the calculation of the index, concentration in this industry. Research shows especially the marginal cost. that there is a significant relationship between profitability and concentration [34]. 3.1.2.9 Logarithmic variance This approach, which seems to be a fairly It is only one of many parameters (such as consistent method, also has some drawbacks. arithmetic mean, median) that can be obtained The main ones are; the differences that may from the same distribution, which is calculated as arise in calculating the firm net profit amount, the the variance of the logarithmic distributions of effects that may arise from the accounting firm size. By using these parameters together systems, the depreciation calculations and the with the variance values, information about the fact that the industry is not in equilibrium. The population distribution can be reached by moving question of which of these concentration criteria, from the sample distribution. For example, the which is quite a lot here can be used, emerges. Lorenz Curve and Gini coefficient allow this. The use of proportional valuation methods such as concentration ratio as well as methods with Logarithmic variance can be calculated by the only absolute approach, such as the number of following formula. firms in an industry or net profitability methods will make it easier to reach more healthy n n interpretations. = 1/ ( )² – 1/²( )² (13)   i1 i1 3.2 Comparison of Concentration 3.1.2.10 Firm numbers Measurements

It can also be interpreted by looking at the Table 2 provides market share and concentration number of firms in an industry. However, as measurements for various firms in order to make mentioned earlier, as the number of firms in a a comparison between various concentration market decreases, it will be far from competitive measurements. There are firms, each of them market qualities, and it will be wrong to make a are equal by size but in different numbers, in A, comment based only on the absolute number of B, and C markets. It can be assumed that the firms. What is important is how many companies competition on the C market is larger than the of the market are under control. When measuring market B and the competition on the market B is concentration in an industry branch, it can be bigger than the market A. The greatest deficiency determined how many companies are in the of the variance and Gini coefficient of the industry branch. It is also possible to try to make logarithms of the concentration criteria arises at a comment based on the lack of the total number this point. These metrics do not give information or the excess in terms of concentration. about the number of firms of equal size. They However, interpretation is certainly useful after reflect unequal quantities between firms. other indicators and measurement methods have been applied. Here it is seen that the markets A and D are very similar. The two companies added to the D 3.1.2.11 Net profitability market have a market share of 1%. The fact that the competition effect of these two firms is In this method, which is called profitability index, negligible is given by the Gini coefficient and the net profit realized by each firm in an industry measures outside the variance of logarithms. is calculated as the profitability ratio for each However, the last two measures show significant company and the average profitability rate for the changes regarding the decline of competition. whole industry by being proportional to the company's capital stock. After this calculation, E, F and G markets cover a larger number of two separate comments can be made. First, it companies. While the market G expects to have can be said that if there are few companies with a more competitive structure than F and the a profitability ratio that is well above the average market F has a more competitive structure, the profitability rate in this industry, they concentrate variance of the logarithms and the Gini in this industry by means of these companies. coefficient yield opposite results. For example, According to another interpretation, if the the 1% of market shares added as from the sixth average profitability ratio in an industry is above firm show that the G market is less competitive a reasonable profitability ratio that can emerge in with significant impacts.

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Table 2. Comparison of some market concentration criteria

Markets Firms A B C D E F G 1 33.3 20 10 33.3 40 40 38 2 33.3 20 10 33.3 30 30 28 3 33.3 20 10 31.4 25 15 13 4 ---- 20 10 1.0 5 10 10 5 ---- 20 10 1.0 ---- 5 5 6 ------10 ------1 7 ------10 ------1 8 ------10 ------1 9 ------10 ------1 10 ------10 ------1 11 ------1 Concentration measure N=3(CR3) 100 60 30 98 95 85 79 N=4(CR4) 100 80 40 99 100 95 89 HHI 0.33 0.20 0.10 0.321 0.315 0.285 0.253 Entropy 1.10 1.61 2.30 1.19 1.22 1.39 1.65 Log. Varience 0 0 0 2.92 0.654 0.562 2.03 Gini Coefficient 0 0 0 0.420 0.275 0.360 0.638

All this causes the Gini coefficient and the volumes, lead to poor economic performance as variance of logarithms to give satisfactory results a result of the shift away from the competition when the number of firms remains constant. (The market. This situation reaches to the points of fact that these criteria have a zero value deterioration of resource distribution and indicates that all firms in the market are of equal decrease of welfare level. Such negativities size). created by oligopolistic and monopolistic structures are not welcomed by societies; Entropy index and HHI seem to be appropriate to prevention of unfair competition, protection of the expectations. In fact, there is no optimal consumers is always on the agenda. Despite the concentration index because the normative fact that there are many studies on market judgments that can guarantee optimality are not structures and results in developed countries, the clear, which can explain different behaviors in fact that the studies in our country are different industries. For empirical research, the inadequate has increased the importance of this index, which depends on the specific nature of study. In the study, the concept of concentration the firm's behavior, will be the most appropriate. was discussed, then the most commonly used methods of concentration measurement were 4. CONCLUSION given together with their strengths and weaknesses. In today's economies, the disruptions in the competition system bring forth monopolistic The concept of concentration used in competition, oligopolistic, and monopolistic determining the market structure by exploiting structures. This necessitated the examination of different sources in the study is theoretically the concept of "concentration" which played an explained. The information about the reasons for important role in explaining the behavior of firms condensation, the factors leading to towards production, sales, price, and concentration, and the criteria used to determine employment policies. Concentration means that condensation has been given. Positive and a small number of firms in an economy are in the negative aspects of sales volume, production, first place in terms of various indicators and capacity, assets, employment, and value added control the sector. As the concentration's being used to determine concentration are explained. high results in economies' or an industry area’s Concentration measurement methods mentioned being controlled by a certain number of firms. in literature have been introduced and application The consequence of the concentration is that studies have been done with samples. The most increasing monopolistic tendencies, along with commonly used among them are concentration higher costs and prices, and lower production ratios and HHI. Concentration rate is calculated

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by the total value ratios of the first four or eight of appropriate and effective analysis methods. the companies ranked according to various According to results of the evaluations, indicators, which are realized by the companies necessary sanctions should be applied in order in which they are located. In other words, the to ensure the competition, and prevent both concentration ratio shows the proportional share producer and consumer from getting damage. of a few largest firms in a company. Concentration grades are classified as low (0- The analysis of the issue of condensation, its 30), medium (31-50), high (51-70) and very high measurement, and its dimensions in terms of (71-100) condensation by CR4 concentration economic structure depends on a very important ratio. This classification is also used in this study. factor. This means that the necessary statistical The most commonly used method with information can be explained in a healthy and concentration ratio is the HHI. It is composed of satisfactory manner. Today, all financial the squares of the market shares of the firms situations, market shares of companies forming determined for a market. This index takes values economies and industries are not considered as between 0 and 1. An index value of 1 indicates hidden information but are considered as that the concentration increases. necessary data for the evaluation of economic performance and firms. It has also been an Since the concentration, for example, is known important task for public authorities to ensure as the production is realized by fewer firms, it that such data are reported in a healthy manner. means getting far away from competition. As the A wide variety of data, from the employment and concentration increases, the number of the firms capacity of firms to the amount of profits, to the competing in the market decreases, so the amount of profits they have, to other proprietors, concentration causes the firms give-up the non- to the sales promoting elements, and to the price competition by agreeing each other or spending they allocate, is important in this sense. make the firms violate other competition. Concentration is an undesirable situation It has become a necessity to fulfill them in order because of factors such as production, price, to process an environment suitable for market employment, technology selection, and economy conditions, to protect consumers, to investment, which are caused by the decisions of properly distribute and use scarce resources, a few large firms in the industry, resulting in and even to control inflation. increased distortions in income distribution, disparity in resource allocation, and utilization. COMPETING INTERESTS There are several suggestions for preventing this situation. Author has declared that no competing interests exist. The primary aim is to prevent concentration and to focus on antitrust laws. Such an effort should REFERENCES not be taken in the form of examining the concentration of market shares only. From the 1. Polat Ç. Yoğunlaşma ve Piyasa Yapısı control of raw material markets to the disability of İlişkisi Çerçevesinde Türk Çimento entry into the market, and from the organic links Sektörünün Yapısal Analizi. Anadolu between firms to the profit lines, a Üniversitesi Sosyal Bilimler Dergisi. multidimensional understanding must take place 2007;7(2):97-116. in such a legal practice. As constraints to 2. Akan M. Policy Implications of Solutions of concentration, antitrust legislation, legal Dynamic Optimal Production and Inventory constraints, entrepreneurial dominance, and the Problems for Turkey. Central Bank ability of large businesses to grow at the same Review. 2002;2:64-73. pace in spite of market growth, reduce 3. Durukan T, Hamurcu Ç. Mobil İletişimde concentration [35]. The implementation of the Pazar Yoğunlaşması: Türkiye ile Competition Act, which entered into force in Kazakistan, Kırgızistan, Tacikistan, 1994, is more important in this regard. The Türkmenistan ve Özbekistan implementation of laws and regulations is Karşılaştırması. Karadeniz Araştırmaları. particularly important in terms of prevention of 2009;6(22):75-86. distortions in the developing economic structure, 4. Al-Obaidan AM. Market structure protection of consumers, and ultimately control of concentration and performance in the inflation.In this context, Turkish Competition commercial banking industry of emerging Authority should evaluate market data via markets. European Journal of Economics,

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