Economics Market Failures Questions
Market concentration refers to the extent to which a small number of firms dominate a particular market. It is measured by indicators such as market share, concentration ratio, or the Herfindahl-Hirschman Index (HHI). Market concentration can lead to market failures when it results in reduced competition and the abuse of market power by dominant firms.
When market concentration is high, it creates barriers to entry for new firms, limiting competition. This lack of competition can lead to several market failures. Firstly, it can result in higher prices for consumers as dominant firms have the ability to set prices above competitive levels. Secondly, it can lead to reduced product quality and innovation as dominant firms have less incentive to invest in research and development or improve their products. Thirdly, market concentration can result in a lack of consumer choice, as consumers have limited options to choose from.
Furthermore, market concentration can also lead to the formation of monopolies or oligopolies, where a single or a few firms have significant control over the market. These firms can engage in anti-competitive practices such as price fixing, collusion, or predatory pricing, further distorting market outcomes and leading to market failures.
In summary, market concentration is the dominance of a few firms in a market, and it can contribute to market failures by reducing competition, leading to higher prices, lower quality, limited consumer choice, and the abuse of market power by dominant firms.