FACULTY OR COMMERCE

DEPARTMENT OF ECONOMICS

MODULE: INDUSTRIAL ECONOMICS EC406

Registration #: R179666T

Surname : PASIPAMIRE

First Names: SIMBARASHE

Programme Code: HECON

Programme Name: BACHELOR OF COMMERCE ECONOMICS HONOURS DEGREE

Attendance Type: Conventional

a)What is market concentration?

Market concentration is the distribution of a given market among the participating companies. It is
also known as seller concentration or industry concentration S Williams 2008. Market concentration
is used when smaller firms account for large percentage of the total market. It measures the extent
of domination of sales by one or more firms in a particular market. The market concentration ratio is
measured by the concentration ratio. The market concentration ratio measures the combined
market share of all the top firms in the industry. ‘Market Share’ is used as a reference here in the
formulae. It could be sales, employment statistics, number of people using a company’s services,
number of outlets etc. The value of top firms or top ‘n’ firms may be three or maximum five. If the
top firms keep on gaining market share, then we say that the industry has become highly
concentrated. To understand market concentration, let’s first understand ‘concentration’.
Concentration within an industry can be defined as the degree at which a small number of firms
make up for the total production in the market. If the concentration is low, it simply means that top
‘n’ firms are not influencing the market production and the industry is considered to be highly
competitive. On the other hand, if the concentration is high, it means that top ‘n’ firms influence the
production or services provided in the market the industry then is said to be oligopolistic or
monopolistic.

b) With reference to clear practical examples, discuss how industry may use the following to
enhance market concentration and profits;

i) Vertical integration

ii) Franchising

Iii) Exclusive Territories

IV) Dealing Exclusive

According to Bain, J. (1956) vertical integration is a strategy whereby a company owns or controls its
suppliers, distributors or retail locations to control its value or supply chain. Vertical integration
benefits companies by allowing them to control process, reduce costs and improve efficiencies.
However, vertical integration has disadvantages, including the significant amounts of capital
investment required. Netflix is a prime example of vertical integration. The company started as a
DVD rental business before moving into online streaming of films and movies licensed from major
studios. Then, Netflix executives realized they could improve their margins by producing their own
original content. Today, Netflix uses its distribution model to promote its original content alongside
programming licensed from studios. Vertical integration occurs when a company takes control over
several of the production steps involved in the creation of a product or service. In other words,
vertical integration involves purchasing and bringing in-house a part of the production or sales
process that was previously outsourced. Typically, a company's supply chain or sales process begins
with the purchase of raw materials from a supplier and ends with the sale of the final product to the
customer.

Franchising is a method of distributing products or services involving a franchisor, who establishes

the brand's trademark or trade name and a business system, and a franchisee, who pays a royalty
and often an initial fee for the right to do business under the franchisor's name and system.
Technically, the contract binding the two parties is the “franchise,” but that term more commonly
refers to the actual business that the franchisee operates. The practice of creating and distributing
the brand and franchise system is most often referred to as franchising many people, when they
think of franchising, focus first on the law. While the law is certainly important, it is not the central
thing to understand about franchising. At its core, franchising is about the franchisor’s brand value,
how the franchisor supports its franchisees, how the franchisee meets its obligations to deliver the
products and services to the system’s brand standards and most importantly – franchising is about
the relationship that the franchisor has with its franchisees. A franchisor’s brand is its most valuable
asset and consumers decide which business to shop at and how often to frequent that business
based on what they know, or think they know, about the brand. To a certain extent consumers
really don’t care who owns the business so long as their brand expectations are met. If you become
a franchisee, you will certainly be developing a relationship with your customers to maintain their
loyalty, and most certainly customers will choose to purchase from you because of the quality of
your services and the personal relationship you establish with them. But first and foremost, they
have trust in the brand to meet their expectations, and the franchisor and the other franchisees in
the system rely upon you to meet those expectations

An exclusive territory can be defined by a number of methods including a certain radius from the
location, postal walks, postal codes, municipal limits and natural boundaries such as rivers. As
previously mentioned, it may be restricted to a mall or the location itself. Some methods work
better in certain situations than others. For instance, a radius would not be effective in a situation
where there are two distinct trading areas separated by a river. It may be practical, and indeed
beneficial, to locate franchises on either side of the bridge, but because of the close proximity of the
two locations a radius may have to be ridiculously small. The criteria for the optimum size of the
territory can sometimes be determined by demographic studies, with a provision that allows
franchisors to place additional units in the territory if certain events take place e.g. population
growth exceeds a certain figure or percentage over a specified period of time. One factor that must
be taken into consideration is the effect caused by latent market demand, which increases the
potential of the marketplace as consumer awareness of a particular product or service gains
recognition. Franchisors typically want to award exclusive territories that retain some flexibility for
modification if market conditions change.

Exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the
buyer to choose what, who and where they deal. This is against the law in most countries which
include the USA, Australia and Europe when it has a significant impact of substantially lessening the
competition in an industry. When the sales outlets are owned by the supplier, exclusive dealing is
because of vertical integration, where the outlets are independent exclusive dealing is illegal (in the
US due to the Restrictive Trade Practices Act, however, if it is registered and approved it is allowed.
While primarily those agreements imposed by sellers are concerned with the comprehensive
literature on exclusive dealing, some exclusive dealing arrangements are imposed by buyers instead
of sellers. Exclusive dealing can be considered as a barrier to entry especially in market that operate
under imperfect competition, which is either Monopoly or Oligopoly where there is price and
product differentiation as well as an imbalance of market power between incumbent, entrants and
competitors due to the existing of vertical integrations within the market, leading to market
inefficiency.
Reference

Bain, J. (1956). Barriers to New Competition. Cambridge, Massachusetts: Harvard Univ. Press.

Curry, B. and K. D. George (1983). "Industrial concentration: A survey" Jour. of Industry. Econ. 31(3):
203–55

Shughart II, William F. (2008). "Industrial Concentration". In David R. Henderson (ed.). Concise
Encyclopaedia of Economics (2nd Ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-
0865976658. OCLC 237794267.

Tirole, J. (1988). The Theory of Industrial Organization. Cambridge, Massachusetts: MIT Press.

Weiss, L. W. (1989). Concentration and price. Cambridge, Massachusetts: MIT Press