复旦大学：《产业经济学 Industrial Economics》教学课件_Industrial Organization 5 Concentration, Mergers, and Entry Barriers

EFMD EQUIS CREDITED Industrial organization LEcture 5 Concentration, Mergers and Entry barriers 學火旦 2- Binglin gong 于 udan university

Binglin Gong Fudan University Industrial Organization Lecture 5 Concentration, Mergers, and Entry Barriers

Questions to Answer 1. Why do firms in some industries make pure profits? 2. When oligopolies make pure profits how come entry of new firms does not al ways occur, thereby eliminating all pure profits? 3. What can explain mergers among firms in a given industry?

Questions to Answer 1. Why do firms in some industries make pure profits? 2. When oligopolies make pure profits, how come entry of new firms does not always occur, thereby eliminating all pure profits? 3. What can explain mergers among firms in a given industry?

Questions to Answer(Cont) 4. What is and what should be the regulators attitudes towards concentrated industries? More precisely, (a) Should the regulator limit and control mergers among firms in the same industry? (b) Even if mergers do not occur, should the regulator attempt to control the degree of concentration in industries?

Questions to Answer (Cont.) 4. What is and what should be the regulators' attitudes towards concentrated industries? More precisely, (a) Should the regulator limit and control mergers among firms in the same industry? (b) Even if mergers do not occur, should the regulator attempt to control the degree of concentration in industries?

Outline of this lecture Discusses and defines methods for measuring the degree of concentration in an industry Analyzes merger activities among firms and how those activities affect the industry's level of concentration Explain why entry does not always occur despite the fact that existing firms in the industry make strictly positive profits--entry barriers entry deterrence

Outline of This Lecture • Discusses and defines methods for measuring the degree of concentration in an industry. • Analyzes merger activities among firms and how those activities affect the industry's level of concentration. • Explain why entry does not always occur despite the fact that existing firms in the industry make strictly positive profits—entry barriers & entry deterrence

Concentration measures The most concentrated industry has a monopoly market structure when the number of firms is greater than one there are two factors that influence concentration (a) the number of firms in the industry, and (b)the distribution of output among the firms in the industry Thus. a measure of concentration should be sensitive to both the distribution of the industry's output across firms as well as the number of firms in the industry

Concentration Measures • The most concentrated industry has a monopoly market structure. • When the number of firms is greater than one, there are two factors that influence concentration: (a) the number of firms in the industry, and (b) the distribution of output among the firms in the industry. • Thus, a measure of concentration should be sensitive to both the distribution of the industry's output across firms as well as the number of firms in the industry

Concentration measures When the market is splitted more evenly among more firms the concentration level is lower Assume there are n firms in an industry Use i as the index for firms.i=l..N qi is the output of firm i Q is the total output in this industry Firms percentage share in industry's output Si-100(qi/Q)

Concentration Measures • When the market is splitted more evenly among more firms, the concentration level is lower. • Assume there are N firms in an industry. Use i as the index for firms, i=1,…, N. qi is the output of firm i. Q is the total output in this industry. • Firm’s percentage share in industry’s output = Si=100(qi/Q)

Concentration measures We can rank them from high to low s(1 is the ith highest share Two measures of concentration Four firm concentration ratio ∑ The herfindahl-Hirshman index HR

Concentration Measures • We can rank them from high to low. S(i) is the ith highest share. • Two measures of concentration – Four firm concentration ratio – The Herfindahl-Hirshman index

Example S(1)S(2)S(3)S(4)S(5)S(6)S(7)S(8)S(9)S(10)14IH 10 500 000 000 803850 20202020000 802000 3100/31003100/30 0 100 449490.250.250250.250.250.250.250259854802 The herfindah -Hirshman index contains more information and is more accurate. It is more frequently used

Example • The Herfindahl-Hirshman index contains more information and is more accurate. It is more frequently used

ergers The terms mergers, takeovers, acquisitions. and integration describe a situation where independently owned firms Join under the same ownership We will use the term merger to refer to any type of joining ownership and disregard the question of whether the merger is initiated by both firms, or whether one firm was taken over by another. Instead we investigate the gains and incentives to merge and the consequences of mergers for the subsequent performance and productivity of the firms involved for consumers' welfare. and for social welfare

Mergers • The terms mergers, takeovers, acquisitions, and integration describe a situation where independently owned firms join under the same ownership. • We will use the term merger to refer to any type of joining ownership and disregard the question of whether the merger is initiated by both firms, or whether one firm was taken over by another. Instead, we investigate the gains and incentives to merge and the consequences of mergers for the subsequent performance and productivity of the firms involved, for consumers' welfare, and for social welfare

Types of mergers Horizontal merger between two competitors Goods are substitutes Vertical merger between a firm producing an intermediate good (or a factor of production) and a firm producing the final good that uses this intermediate good Conglomerate: merger between firms producing less related products

Types of Mergers • Horizontal: merger between two competitors: Goods are substitutes. • Vertical: merger between a firm producing an intermediate good (or a factor of production) and a firm producing the final good that uses this intermediate good. • Conglomerate: merger between firms producing less related products