Article Review
It has been observed in the last two decades that market concentration is increasing for a large number of industries. In 1996 around one fourth of the industries were highly concentrated which has increased to one third in recent times . The increased concentration is the result of increased number of cases of mergers and acquisitions.
The effects of increased concentration are manifold. First of all, it increases the market power of the few firms that dominate the industry. Secondly, the merger or acquisition increases the scale of operation of the merged entity. With a larger scale the firms get the benefit of economies of scale. The average cost of production comes down. If the benefit of such fall in average cost can be passed on to the consumers, increased concentration will be beneficial for the society as a whole. But what we notice in reality is that the firms tend to use the market power to increase their profits. They restrict the supply to increase the prices thereby reaping higher profits. Thus the consumers have to bear the brunt of increased concentration.
It is not only the consumers who are adversely affected. Small firms also feel the pressure of the dominance by big firms. Unable to compete with the giants the small firms often tend to close down or sell off to the big firms, further increasing the concentration in the market. The large firms tend to maintain their monopoly power by restricting entry into the market. Thus, for the economy as a whole concentration leads to welfare deterioration and calls for a greater vigil by the anti-trust body.
In the figure below we depict the effect of concentration on the prices that the consumers face. Increased concentration leads to lowered supply as shown by the leftward shift in the supply curve from S0 to S1. The closure of the small firms also adds to this fall in supply. The fall in supply creates excess demand raising the price from P0 to P1.
S0
P1
P0
D
Q1 Q0 Q
Works Cited
Francis, Theo and Ryan Knutson. "Wave of Megadelas Tests Antitrust Limits in U.S." The Wall Street Journal 18 October 2015: 5. English.
Varian, Hal R. Intermediate Microeconomics A Modern Approach. 8th. New York: W. W. Norton & Company, 2010.
