Such market formations are known as
oligopolies. Oligopolies encourage customers to collaborate in
oligopsonies and these, in turn, foster further consolidation among
suppliers, service providers, and manufacturers.
Market purists consider oligopolies - not to mention cartels - to be as
villainous as monopolies. Oligopolies, they intone, restrict
competition unfairly, retard innovation, charge rent and price their
products higher than they could have in a perfect competition free
market with multiple participants. Worse still, oligopolies are going
global.
But how does one determine market concentration to start with?
The Herfindahl-Hirschmann index squares the market shares of firms in
the industry and adds up the total. But the number of firms in a market
does not necessarily impart how low - or high - are barriers to entry.
These are determined by the structure of the market, legal and
bureaucratic hurdles, the existence, or lack thereof of functioning
institutions, and by the possibility to turn an excess profit.
The index suffers from other shortcomings. Often the market is
difficult to define. Mergers do not always drive prices higher.
University of Chicago economists studying Industrial Organization - the
branch of economics that deals with competition - have long advocated a
shift of emphasis from market share to - usually temporary - market
power.
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