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LOCATION THEORY: A theoretical framework for studying the location decisions made of firms and households based on transportation cost and spatial differences in the accessibility of inputs and markets for outputs. Location theory, developed with noted contributions from August Losch, Alfred Weber, Johann von Thunen, Walter Christaller, and Walter Isard, explicitly considers the cost of transportation in the production and consumption choices made by firms and households. Location theory has been used to explain urban density, labor migration, and land use.

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OLIGOPOLY, CONCENTRATION:

Oligopoly is a market structure that contains a small number of relatively large firms, meaning oligopoly markets tend to be concentrated. A small number of large firms account for a majority of total output. Concentration unto itself is not necessarily bad, but it often leads to inefficient behavior, such as collusion and nonprice competition. Concentration is measured in three ways--market share, concentration ratio, Herfindahl index.
Concentration is a primary feature of oligopoly. In fact, oligopoly is the only one of the four market structures where concentration is really an issue. Because monopoly is the only supplier in a market, concentration is not particularly relevant. The monopoly IS the market. Because monopolistic competition and perfect competition contain large numbers of small firms, concentration is barely measurable.

Oligopoly has a small number of large firms producing a majority of the total industry output. This means that production and sales tend to be concentrated in the hands of a relatively few firms. For many oligopoly markets, the ten largest firms often account for over 75 percent of total sales. For some oligopoly industries, the three to four largest firms account for over 90 percent of the market. Such concentration is what leads to some of the more interesting behavior of oligopoly, like collusion and nonprice competition.

The identification and measurement of concentration in an oligopoly market quite useful. Concentration measurement is generally accomplished in one of three ways.

  • Market Share: The simplest measure of concentration is the share of the market held by one or more firms in the industry. This is typically computed as the fraction of total sales or total production accounted for by one or more firms. For example, OmniCola sells $460 million of soft drinks each year. Total soft drink sales in the Shady Valley market are $2,000 million. As such, OmniCola has a market share of 23 percent.

  • Concentration Ratio: This measure of concentration combines the market shares for the largest number of firms in an industry to indicate the degree of market concentration. The two most popular concentration ratios are for the four or eight largest firms in an industry. More specifically a concentration ratio is the fraction of total industry activity accounted for by the four or eight largest firms in the market. For example, the top four firms in the $2-billion Shady Valley soft drink market account for $460 million, $350 million, $225 million, and $190 million worth of sales. This gives a four-firm concentration ratio of about 61 percent. Concentration ratios fall somewhere in the range of 0 to 100 percent.

  • Herfindahl Index: This measure was developed to compensate for a few problems associated with concentration ratios. In particular, the standard four-firm and eight-firm concentration ratios ignore the activity of firms not included in the calculation. The Herfindahl index includes the market shares of all firms in the market. Moreover, rather than simply adding the market shares, the Herfindahl index squares each market share before adding. This little trick has the added feature of placing greater weight on larger market shares. The Herfindahl index generates values between 0 and 10,000.
Measures of concentration are the first bits of information that government officials consider when questions arise about the possible violation of antitrust laws. While concentration itself is not bad or inefficient, abuse of market control is easier and more likely with greater concentration.

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OLIGOPOLY, CONCENTRATION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: May 22, 2024].


Check Out These Related Terms...

     | market share | concentration ratio | four-firm concentration ratio | eight-firm concentration ratio | Herfindahl index |


Or For A Little Background...

     | oligopoly | oligopoly, behavior | oligopoly, characteristics | industry | market structures | market control | firm | industry | competition among the few | short-run production analysis | profit maximization | production |


And For Further Study...

     | merger | conglomerate merger | horizontal merger | vertical merger | collusion | explicit collusion | implicit collusion | barriers to entry | product differentiation | game theory | cartel | kinked-demand curve |


Related Websites (Will Open in New Window)...

     | U.S. Chamber of Commerce |


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