Focus on Seller concentration levels
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Published: Mon, 5 Dec 2016
Seller concentration can be looked at as the number of producers in a particular sector of the economy and their comparative share of that market sector. Where the number of producers of a good or service in a particular sector is very big, each producer will only controls a very small share of the market. Due to the large number of sellers in the market, no particular seller can try to influence the prices of good and services in the sector because say if they try to increase their prices, there are so many competitors in the market that consumers will almost immediately seek out substitutes. In almost the same way and for the same reason, no one operator in the market will not be able to influence the income of another operator in the sector. Seller or market concentration therefore can be said to be the measure of control that firms in an industry get over the market or the intensity of competition that exist in a given market. The term generally used in modern day economics to describe this situation is atomistic competition.
When just a few large firms produce the output of a particular industry, there is a possibility that firms can reach an agreement on the direction in which they want the industry to go. This can either be in terms of pricing out put which in some cases might be beneficial to customers or it might be in terms of improvement and advancement in technology, new ways in which to achieve efficiency and on things such as sustainability. Also if just a few products characterize this industry, it will be easy for governing bodies to be able to monitor malpractice and possible deviations from an agreed line of practice. As such, in a market, which is characterized by high seller concentration levels, market power is going to most likely be a high occurrence.
The level of seller concentration determines the type of market structure, which is in operating in the given industry and it is important to note that there are various market structures, which exhibit great characteristics of the scenario of intense competition or great control of the market. Example of these includes a perfectly competitive market, an oligopoly and a monopolistic competitive market.
In a perfectly competitive market, due to the level of seller concentration in the market, firms try as much as possible to produce at a level, which is efficient. The make the most of resources that are available to them to produce goods at a price, which is almost, equal to or marginally above their cost price. In order to survive and remain in the market, firms must set their price at a price, which is equal to the market price of, that good or service. Theoretically, seller concentration in a perfectly competitive market is good because economic efficiency is almost always achieved and in a world in which resources are scarce and limited, this is very important. Policy makers on the other hand have very little to worry about in terms of trying to regulate this type of market as a perfectly competitive market almost always regulates itself. Say for example, a producer tried to increase the price of the good that they produce, what is mostly likely to happen is that since there is ready and easily available substitutes for these items, consumers will just substitute the more expensive goods with the cheaper one and the firm which is trying to charge a higher price is gradually going to be clouded out as the loose sales. Of interest to policy makers however is the fact that this type of market does not encourage innovation and creativity, a thing which I think is needed for the continuous development and advancement of any economy. Also consumer choice is limited as there is very little difference between the goods that are produced in this industry. Also of interest will be the fact that if by any chance, imperfections arise in this type of market, say for example externalities in production or consumption, the perfectly competitive market is a risk of failing and government will have to intervene. There are no economic or political barriers to operational entry in this type of market and there is uniformity in product information as such customers really to not find any difference in quality of the product
Perfectly competitive market theory being used as a foundations for price theory is often criticized as being too passive in agent representation. This therefore reduces the incentive to increase profits and ones welfare by undercutting price, improving product design, there is no incentive to advertise and real lack of motivation to innovate.
Another type of market structure, which displays seller concentration and immense market control, is the oligopoly. An oligopoly is a market structure where in the market a few large firms dominate. In this type of market they are many sellers of the product or the good and service in question but a few very big seller who have great control of the market characterizes the market. The actions of one of these companies will definitely influence the way in which other firms in the same industry act. Planning in this type of industry always and should always take into consideration possible actions by competitors. Typically, firms in this industry maximize their profits by producing at a point were marginal cost is equal to marginal revenue. This gives the firms in this sector some allowance to want to innovate, to want to invest in research and development and there is an incentive to invest in technological advancements.
The main thing in a seller concentrated market is the existence of a lot of competition. Even though the concept of competition is central to many economic theories, the ways by which it works and contributes to economic development differs widely amongst economist, policy makers and bureaucrats.
Looking at the history of economic thought, some deeply contrasting views regarding competition have been provided. The concept of perfect competition however has survived as the standard model for analyzing and has had great influence with policy making surrounding competition regulations.
Competition can be looked at as a force which can eliminate excess profits and cancel out unsatisfied demand. Classical economic theory emphasized price determination through competition rather than through price determination, which is politically motivated. Firms participating in a perfectly competitive market would set prices of goods and services provided based on changes in market conditions the market mechanism has several advantages and disadvantages. Without the need for conscious control, important decision making of a very large number of economic agents is successfully coordinated.
Policy makers consider perfectly competitive market desirable because they do not have to worry about pricing in this industry. Policy makers are aware of the constraints in this type of market as such they know that any imperfections in the market place will eventually correct itself. A perfectly competitive market does not give firms the opportunity to change prices significantly higher than their cost of production. If this were the case, due to very limited barriers to entry in this kind of market, new investors will eventually crowd the market out and this will erode the abnormal profits that the firms already existing in that industry were already making. Another reason as to why a perfectly competitive market is of interest to policy makers and theories is that there is a large amount of good available to consumers. This is because firms in this industry realistically can not charge a price for the goods and services which gives them an abnormal profit. As such the only other realistic way of making a profit is by trying to increase rate of sale which in turn increases the rate of turn over for the company. As such, companies make the maximum use of existing resources to produce as much as they can. Efficiency is key in this kind of market.
Looking at the situation in an oligopolistic market, there is no single theoretical frame work which we can say has been successful in providing efficient and adequate answers to pricing and output decisions. Analysis in this type of situation exist only for particular situations. If for example, a firm in an oligopolistic market cuts the price of its goods or services in a bid to attract sales and increase profits, the corresponding effect will therefore be that other firms in this industry are going to cut their prices so that they too can stay in the hunt for sales.
In conclusion therefore, seller concentrated markets and markets in which there is intense market control. Will only be regulated if the market to an extent fails to regulate itself. Regulatory bodies rally only worry about what is happening when the industry stops to play by the rules. It is true that a lot of politicians and people in power only worry about their own interest but citizens who are consumers put them in power and it is only fair that the citizens or consumers best interest is safeguarded in what ever is done. Providing goods and services in the industry at a very competitive price is in the best interest of the consumers. Also, as a result of availability of extensive competition, the is the availability of choice for the public which is definitely a good thing. Earl economic theory as well as recent economic literature all advocate for the efficient allocation of resources. Economics has in its definition the efficient allocation of scarce resources. A seller concentrated market will definitely provide a platform for the efficient allocation of scarce resources. In a perfectly competitive market, in order for firms in the industry to survive, they have to manage their resources efficiently so that they can fend off competition. Seller concentration is therefore essential in both public and theoretical interest as it prices for goods and services are regulated and kept fair due to the existence of competition and availability of close substitutes. Also, economic theory advocates for efficient allocation of resources, and it is essential to know that in a seller concentrated market, resources are allocated efficiently.
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