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Market Structure and Concentration Ratio: Evidence of It Companies in Hungary

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Market Structure and Concentration Ratio: Evidence of It Companies in Hungary Forum Scientiae Oeconomia • Volume 7 (2019) • No. 3 MARKET STRUCTURE AND CONCENTRATION RATIO: EVIDENCE OF IT COMPANIES IN HUNGARY JUDIT OLÁH, JÓZSEF POPP, DOMICIÁN MÁTÉ, YUSMAR ARDHI HIDAYAT ABSTRACT DOI: 10.23762/FSO_VOL7_NO3_1 The high numbers of Information Technology (IT) companies in Hungary may correlate with their market share. The num- ber of existing companies may create a market structure and high levels of concentration. Therefore the purpose of this JUDIT OLÁH research is to analyse the market structure and concentra- e-mail: [email protected] tion of IT companies in Hungary. Data used in this research University of Debrecen, is secondary data, and the tools of analysis used are the Debrecen, Hungary Hirschman-Herfindahl Index (HHI) and Concentration Ratio (CR). The results suggest that the type of market structure JÓZSEF Popp of IT companies in Hungary can be categorised as an oli- e-mail: [email protected] gopoly with low concentration. It follows that there is no lead- Szent István University, ing company on the IT market. Here the findings indicate that Gödöllő, Hungary telecommunication providers are deemed to be leaders in the IT industry in Hungary. In the oligopoly market, the strat- DoMICIÁN MÁTÉ1 egy of a telecommunication provider would influence other e-mail: [email protected] competitors to set the price and differentiate their services. In addition, the government may stimulate the development of YUSMAR ARDHI HIDAYAT IT companies by imposing a differentiated tax. e-mail: [email protected] University of Debrecen, KEY WORDS Debrecen, Hungary Information technology companies, market structure, con- centration ratio, and oligopoly. 1Corresponding author Introduction Information technology (IT) companies fied within code 51 including Magazines, produce value-added products or services Books and Software (511); Publishing of related to information technology, including periodicals, periodicals, books and directo- computer hardware, software, electronics, ries (5111); Software publishing (5112); Film semiconductors, internet, telecommunica- Production and Music Exhibitions (512); tion equipment, and e-commerce (Jaya- Broadcasting (excluding Internet) (515); wardane and De Alwis, 2017). IT compa- Radio and Television Broadcasting (5151); nies use hardware, software, services, and Cable and other pay-TV services (5152); supporting infrastructure to manage and Telecommunications (517); Wired and deliver information using voice, data, and wireless telecommunications (5173); Wired video (Žuľová et al., 2018). Based on the and wireless telecommunications (51731); North American Industry Classification Wired telecommunications (517311); Wire- System (NAICS), the IT industry is classi- less telecommunications (excluding satel- Paper received: 4 June 2019 • Paper revised: 15 August 2019 • Paper accepted: 22 August 2019 8 Forum Scientiae Oeconomia • Volume 7 (2019) • No. 3 lite) (517312); Data processing, web-host- the business areas of telecommunication, ing (518); Other IT Services (519); Other IT mobile phone, fixed-line, broadband in- Services (5191); and Online Media (51913) ternet, and pay-tv (EMIS, 2018a). Further- (EMIS, 2018a). more, the market has been concentrated The Hungarian IT industry contributed on the influence of just a few companies. In 5% of the overall Gross Domestic Product line with the rapid growth of e-commerce, in the last two years. The IT industry also the IT industry has been growing rapidly had net revenues of approximately 8.7 mil- for the last five years. The development of lion Euro in 2016, an increase of up to 0.9% IT companies in Hungary over a five-year year on year. The Hungarian IT sector is period is shown in Figure 1. dominated by multinational companies in Figure 1. Number of IT companies in Hungary 2013-2017 Source: EMIS, 2018b. Many Information Technology (IT) com- also encountered challenges in the forth- panies sharply flourished in the three years coming years in terms of the development since 2013, reaching a peak in 2015. How- of 5G services and Industry 4.0. Further- ever, the number rapidly decreased be- more, government regulations have im- tween 2015 and 2017. In general, there was posed special telecommunication and util- a slight increase in the quantity of IT com- ity taxes on the IT industry. However, the panies by approximately 2% for five years government pressures the IT Industry to from 2013 until 2017. The number of IT provide services at an economical price. In companies in Hungary will probably stead- comparison to Central European countries ily increase after 2017. This shows that IT in 2017, the GVA of the Hungarian IT sector companies face a fierce level of intense reached about 1.2 billion Euro which was competition on the Hungarian IT market. only one-third of Poland’s GVA. The GVA In spite of stiff competition, the Hungar- of the Hungarian IT sector was lower than ian IT industry has a stable share of Hun- Austria, Romania, and the Czech Republic, gary’s economy, contributing between which have GVA of more than 2.5 billion approximately 4.9% and 5.6% of Gross Euro (EMIS, 2018a; Androniceanu, 2019). Value Added (GVA) between 2008 and Profit-seeking is the main reason why 2015. This industry has also contributed IT companies enter the market. The profit positively to economic growth during the fluctuation of IT companies from 2013 until economic crisis period. The IT industry has 2017 is depicted in Figure 2. Market structure and concentration ratio: evidence of IT... 9 Figure 2. Profit of IT companies in Hungary 2013-2017 (Million Euro) Source: EMIS, 2018b. Based on Figure 2, the beginning profit It is important to analyse the market struc- was about 0.8 million Euro, then profit dou- ture and concentration in IT companies in bled from 2013 to 2014. However, the profit Hungary because there are more than 1300 decreased significantly between 2014 and companies which are active on the market. 2016 to the lowest level of profit of about The companies may try to obtain profit in 0.6 million euro. The final profit recorded in a competitive market. The number of compa- 2017 was slightly higher at about 1.2 million nies in the market determines how concen- Euro. In general, profit fluctuated but tend- trated the market is. As a result, the market ed to increase slightly during the five years concentration may determine the number of when this sector grew rapidly (Borocki et market shares based on the profit acquired al., 2019). Based on the correlation be- by IT companies (Oláh et al., 2018). A higher tween the number and profit of IT compa- level of market concentration may result in nies in Hungary, one may conclude in gen- lower revenues, while lower market concen- eral that the slight increase in the number tration may increase the level of profits (Ga- of IT companies in Hungary may result in a vurova et al., 2017). Based on the aforemen- corresponding slight increase in company tioned points, the purpose of this research profit. There are many companies on the is to investigate the market structure and market, which may lead to tight competi- concentration of IT companies in Hungary. tion. IT companies may compete with many This research is based on a scientific competitors for profits. In addition, market background of market structure, con- concentration is correlated with the high or centration, and implication in the case of low level of their profits. Furthermore, the Hungarian IT companies. We apply the level of profits obtained by these compa- Herfindahl-Hirschman and Concentration nies indicates the level of company per- Ratio to analyse the data. Subsequently, formance on the market (Gavurova et al., we deliberate certain empirical evidence of 2017). Hungarian IT companies may use the links between government policy and their profits to support company perform- market structure. Finally, we shall summa- ance and improve their ability to meet fu- rise some of the implications of the results ture challenges supporting Industry 4.0. for further research. 10 Forum Scientiae Oeconomia • Volume 7 (2019) • No. 3 1. Literature review short run. Next, the monopolist may set the Market structure is defined in terms of marginal cost similar to marginal revenue the market power of firms. Market power in the long term. The monopoly market im- describes a situation in which a company plies a negative effect on the market be- has power over price. In the operational cause the monopolist may impose a high view, market power refers to monopolistic, price on customers. oligopolistic or competitive power (Pandey, 1.3. Oligopoly 2004; Sanusi et al., 2017). Market classifi- An oligopolistic industry is one in which cation is based on the importance of indi- only a few companies determine the vidual firms in relation to the entire market change of output quantity and price, which in which they operate, and whether the may affect others. As a consequence, products sold in a particular market are ho- other companies will respond to an adjust- mogenous. From this taxonomy, there are ment in price or output based on decisions four market types, namely pure competi- made by one firm. In general, companies tion, pure monopoly, oligopoly, and mo- may offer different products or services on nopolistic competition (Meyer et al., 2017; the oligopolistic market. The companies Nguyen and Kira, 2014). The various types offer similar characteristics of products or of market are described below. services to customers by offering a lower 1.1. Perfect competition price than market price to get a special A significant factor is symmetric informa- market share. In connection with the above, tion on the market. Consumers have per- IT companies may improve the quality of fect information about the product or serv- services offered to the customer in order ice offered by the company. IT companies to compete in the market.
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