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Firmansyah, S.E., M.Si., Ph.D

FEB UNDIP

Introduction

Analisis kompetisi perusahaan-perusahaan, mencakup

key-elements of industry structure

The most important characteristics of industry

structure include the number and size distribution of

rms, the existence and height of barriers to entry and

exit, and the degree of product differentiation

Seller concentration refers to the rst of these

elements: the number and size distribution of rms.

In empirical research in industrial organization, seller

concentration is probably the most widely used

indicator of industry structure

The denition of a market is straight-forward in theory,

but often more problematic in practice.

Serviceable theoretical denitions can be found in the

works of the earliest, nineteenth-century economists.

The entire territory of which parts are so united by the

relations of unrestricted commerce that prices there take

the same level throughout, with ease and rapidity

(Cournot, 1838 pp. 512Fn).

prices of the same goods tend to equality with due

allowance for transportation costs (Marshall, 1920, p. 270)

contains both a product dimension and a geographic

dimension

The product market denition should include all products that are

close substitutes for one another, both in consumption and in

production.

Goods 1 and 2 are substitutes in consumption if an increase in the

price of Good 2 causes consumers to switch from Good 2 to Good

1.

The degree of consumer substitution between Goods 1 and 2 can

be measured using the cross-price elasticity of demand

Good 1s elasticity of demand with respect to a change in the price

of Good 2 is:

A large and positive cross-price elasticity of demand indicates that the two goods in

question are close substitutes in consumption (for example, butter and margarine).

In contrast, a large and negative cross-price elasticity of demand indicates that the

two goods are close complements (for example, camera and lm). However, this

could also imply that they should be considered part of the same industry. CD

players and ampliers might be grouped together as part of the hi- equipment

industry. But what about cars and petrol? These goods are also complementary,

but would it be sensible to include motor manufacturers and oil companies in the

same industry group?

Good 1 produced by rm A, and Good 2 produced with similar technology by rm

B are substitutes in production if an increase in the price of Good 1 causes rm B

to switch production from Good 2 to Good 1.

In this case, rms A and B are close competitors, even if from a consumers

perspective Goods 1 and 2 are not close substitutes. For example, Good 1 might be

cars and Good 2 might be military tanks.

No consumer would decide to buy a tank simply because there has been an

increase in the price of cars. But on receiving the same price decide to switch to

car production.

The degree of producer substitution between Goods 1 and 2 can be measured

using the cross-price elasticity of supply. Good 1s elasticity of supply with respect

to a change in the price of Good 2 is: signal, a tank producer might decide to

switch to car production. The degree of producer substitution between Goods 1

and 2 can be measured using the cross-price elasticity of supply.

Good 1s elasticity of supply with respect to a change in the price of Good 2 is:

determining whether an increase in the price

of a product in one geographic location

signicantly affects either the demand or

supply, and therefore the price, in another

geographic location. If so, then both locations

should be considered part of the same

geographic market. In principle, a similar

analysis involving spatial cross-price

elasticities could be used

classification

The International Standard Industrial Classification of

All Economic Activities is a United Nations system for

classifying economic data. The United Nations Statistics

Division describes it in the following terms:

Wide use has been made of ISIC, both nationally and

internationally, in classifying data according to kind of

economic activity in the fields of production, employment,

gross domestic product and other statistical areas. ISIC is a

basic tool for studying economic phenomena, fostering

international comparability of data, providing guidance for

the development of national classifications and for

promoting the development of sound national statistical

systems.

ISIC Indonesia

kbli_2009.pdf

Measures of concentration

Seller concentration, an indicator of the

number and size distribution of rms, can be

measured at two levels:

1) for all rms that form part of an economy,

located within some specic geographical

boundary;

2) for all rms classied as members of some

industry or market, again located within some

specic geographical boundary.

concentration, reects the importance of the largest rms in the

economy as a whole

Typically, aggregate concentration is measured as the share of the n

largest rms in the total sales, assets or employment (or other

appropriate size measure) for the economy as a whole

The number of rms included might be n = 50, 100, 200 or 500

Aggregate concentration might be important for several reasons:

if aggregate concentration is high, this might have implications for

levels of seller concentration in particular industries;

aggregate concentration data might reveal information about the

economic importance of large diversied rms, which is not

adequately reected in indicators of seller concentration for particular

industries;

if aggregate concentration is high, this might indicate that the

economys largest rms have opportunities to exert a disproportionate

degree of inuence over politicians or regulators, which might render

the political system vulnerable to abuse

known as industry concentration or

(alternatively) market concentration, reects

the importance of the largest rms in some

particular industry or market

measures at industry level. To assist users in making an informed

choice between the alternatives that are available, Hannah and Kay

(1977) suggest a number of general criteria that any specic

concentration measure should satisfy if it is to adequately reect

the most important characteristics of the rm size distribution:

Suppose industries A and B have equal numbers of rms. Industry A

should be rated as more highly concentrated than industry B if the

rms cumulative market share (when the rms are ranked in

descending order of size) is greater for industry A than for industry B

at all points in the size distribution.

A transfer of market share from a smaller to a larger rm should

always increase concentration.

There should be a market share threshold such that if a new rm

enters the industry with a market share below the threshold,

concentration is reduced. Similarly, if an incumbent rm with a market

share below the threshold exits from the industry, concentration is

increased.

Any merger between two incumbent rms should always increase

concentration.

concentration measures that are in use satisfy

all of the Hannah and Kay criteria. This section

examines the construction and interpretation

of the most common measures of seller

concentration. These arethe n-rm

concentration ratio, the HerndahlHirschman

index, the Hannah-Kay index, the entropy

coefcient, the variance of the logarithms of

rm sizes, and the Gini coefcient.

Concentration Ratio

Hannah and Kay (1977)suggest the following generalization of the HH index:

equal to one, because HK(1) = 1 for any rm size distribution

The last two points are illustrated in Table 6.8. For I1 the contribution to the HK(1.5)

index of rm 1 (the largest rm) is 45.8 per cent (0.2003 out of 0.4376). But rm 1s

contribution to the HK(2.5) index is 63.8 per cent (0.0686 out of 0.1076). Our earlier

comments about the favourable properties of the HH index apply in equal measure to

the HK() index. Furthermore, the larger the value of , the smaller the degree of

inaccuracy if the HK() index is calculated using accurate individual data for the largest

rms, but estimated data for the smaller rms.

Entropy coefficient

industry, and E is large for an industry with low concentration

In Tables 6.5 and 6.6, E is 1.3721 (for I4), 1.7855 (I1) and 1.8236 (I5).

Therefore E correctly identies I4 as more concentrated than I1, and I1 as

more concentrated than I5

The minimum possible value is E = 0, for an industry comprising a single

monopoly producer. The maximum possible value is E = loge(N), for an industry

comprising N equal-sized rms

not depend on the number of rms (RE)

The minimum possible value is RE = 0 for a monopoly, and the maximum possible

value is RE = 1 for an industry comprising N equal-sized rms.

In statistics, a variance provides a standard measure of dispersion

or inequality within any data set. In the case of data on the sizes of

rms in an industry, the statistical property of dispersion or

inequality is closely related to (but not identical to) the economic

property of seller concentration.

In Table 6.5, dispersion in I2 is zero (because all rm sizes are the

same), but dispersion in I4 is much higher (due to the inequality in

the rm size distribution). Clearly, seller concentration is higher in I4

than in I2. Accordingly, the variance of the logarithms of rm sizes,

VL, can be included among the list of concentration measures

(Aitchison and Brown, 1966).

VL is dened as follows:

For the purposes of calculating VL, the rm size data are expressed in logarithmic form

for the following reasons:

Most industries have a highly skewed rm size distribution, with large numbers of

small rms, fewer medium-sized rms and very few large rms. The variance of the

(untransformed) rm size data would therefore tend to be unduly inuenced by the

data for the largest rms. The log-transformation reduces or eliminates the skewness

in the original distribution, enabling VL to provide a more reasonable measure of

inequality across the entire rm size distribution.

The variance of the (untransformed) rm size data would be inuenced by the scaling

or units of measurement of the data. VL, in contrast, is unaffected by scaling. For

example, if ination caused the reported sales data of all rms to increase by 10 per

cent, the variance of the (untransformed) sales data would increase, but VL would be

unaffected. In this case, there is no change in concentration or dispersion because the

sales of all rms are increased in the same proportions. VL reects this situation

accurately.

it is more accurate to interpret VL as a measure of dispersion or inequality in

the rm size distribution. The distinction can be illustrated using the following

examples taken from Tables 6.5 and 6.6:

Both I2 and I3 have VL = 0 because in both cases all rms are equal-sized, so

there is no inequality. From an industrial organization perspective, however, it

seems clear that I3 is more highly concentrated than I2. I3 has fewer rms

than I2, making it more likely that a cooperative or collusive outcome will be

achieved.

An economist would regard I6 as more concentrated than I1. However, the

merger between the three smallest rms in I1 to form I6 implies I6 has a lower

degree of inequality in its rm size distribution than I1. Accordingly VL is

smaller for I6 than for I1. When we switch from I1 to I6, VL moves in the

opposite direction to HH and HK(), and in the wrong direction from the

economists perspective.

A Lorenz curve (named after Lorenz, 1905) shows the variation in the

cumulative size of the n largest rms in an industry, as n varies from 1 to N

(where N is the total number of rms)

the largest to the smallest (reading from left to right)

along the horizontal axis. The vertical axis shows the

cumulative size (the sum of the sizes of all rms from

rm 1 to rm n, as a function of n)

If all of the rms are equal-sized, the Lorenz curve is the

45-degree line OCA. At point C, for example, exactly half of

the industrys member rms account for exactly half of the

total industry size, represented by the distance OD.

If the rm size distribution is skewed, the Lorenz curve is

the concave curve OBA. At point B, exactly half of the

industrys member rms account for three-quarters of the

total industry size, represented by OD.

The Lorenz curve can be used to dene a concentration measure due to Gini (1912),

known as the Gini coefcient. With reference to Figure 6.1, the Gini coefcient is

dened as follows:

rm with a market share approaching one, and N 1 very small rms each with

a negligible market share. In this case the Lorenz curve approaches the line ODA,

so the numerator and denominator in the formula for G are the same.

The minimum value of G = 0 corresponds to the case of N equal-sized rms. In

this case the Lorenz curve is the 45-degree line OCA, so the numerator in the

formula for G is zero.

The formula denition for the Gini coefcient is as follows:

where xi is the size of rm i (as before,

measured using sales, assets, employment or

some other appropriate size indicator) when

the rms ranked in descending order of size

coefcient is most accurately interpreted as a measure of

inequality in the rm size distribution. In fact, elsewhere in

economics one of the best known applications of the Gini

coefcient is for the measurement of inequality in household

incomes. In our case, Tables 6.5 and 6.6 show that both I2 and I3

have G = 0, because in both cases all of the rms are equal-sized.

As before, however, an industrial economist might regard I3 as

more highly concentrated than I2. Furthermore, I6 has G =

0.3129, smaller than G = 0.4482 for I1. But an industrial

economist would regard I6 as more concentrated than I1.

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