Concentration (Economics)

The extent to which a number of firms account for a proportion of sales in an industry. Concentration is said to be high when very few firms account for a high percentage of sales in an industry. This is a propensity toward monopolizing an industry.

The U.S. government has traditionally discouraged trusts or combinations in restraint of trade since the 19th century, when antitrust laws were passed to promote a much more favorable competitive market [Page 97]environment. Prominent statutes to check conspiracy and restraint of trade include the Sherman Anti-Trust Act of 1890, the Clayton Act of 1914, and the Robinson-Patman Act of 1936.

Preference for competition, unlike in the monopolistic structure, is based on the view that competition leads to efficiency, reasonable prices (hence, improved welfare), and the provision of better services. Natural monopolies may arise because of initial outlays and the per unit cost associated with production. Yet in today's market environment, the probability of having a complete monopoly is highly unlikely.

The U.S. government has established guidelines for mergers based on a concentration ratio that calculates the percentage of market shares of firms within an industry to determine allowable mergers. On rare occasions, horizontal (competitive) mergers may be permitted if one firm is endangered and suffering from major losses.

The Federal Trade Commission (FTC) and the Justice Department use the Clayton Act to prevent such mergers when they are inappropriate. For example, the U.S. government blocked the mergers between Staples and Office Depot (two major office supply retailers) and WorldCom and Sprint. Vertical (supply-producer-distribution) mergers escape antitrust regulation more often because they eliminate intermediation more than competition. For more information, see McConnell and Brue (2008).