Problems
The usefulness of this statistic to detect and stop harmful monopolies however is directly dependent on a proper definition of a particular market (which hinges primarily on the notion of substitutability).
- For example, if the statistic were to look at a hypothetical financial services industry as a whole, and found that it contained 6 main firms with 15% market share apiece, then the industry would look non-monopolistic. However, one of those firms handles 90% of the checking and savings accounts and physical branches (and overcharges for them because of its monopoly), and the others primarily do commercial banking and investments. In this scenario, people would be suffering due to a market dominance by one firm; the market is not properly defined because checking accounts are not substitutable with commercial and investment banking. The problems of defining a market work the other way as well. To take another example, one cinema may have 90% of the movie market, but if movie theatres compete against video stores, pubs and nightclubs then people are less likely to be suffering due to market dominance.
- Another typical problem in defining the market is choosing a geographic scope. For example, firms may have 20% market share each, but may occupy five areas of the country in which they are monopoly providers and thus do not compete against each other. A service provider or manufacturer in one city is not necessarily substitutable with a service provider or manufacturer in another city, depending on the importance of being local for the business—for example, telemarketing services are rather global in scope, while shoe repair services are local.
The United States Federal anti-trust authorities such as the Department of Justice and the Federal Trade Commission use the Herfindahl index as a screening tool to determine whether a proposed merger is likely to raise antitrust concerns As the market concentration increases, competition and efficiency decrease and the chances of collusion and monopoly increase.
Read more about this topic: Herfindahl Index
Famous quotes containing the word problems:
“It’s so easy during those first few months to think that the problems will never end. You feel as if your son will never sleep through the night, will always spit up food after eating, and will never learn to smile—even though you don’t know any adults or even older children who still act this way.”
—Lawrence Kutner (20th century)
“More than a decade after our fellow citizens began bedding down on the sidewalks, their problems continue to seem so intractable that we have begun to do psychologically what government has been incapable of doing programmatically. We bring the numbers down—not by solving the problem, but by deciding it’s their own damn fault.”
—Anna Quindlen (b. 1952)
“The question of place and climate is most closely related to the question of nutrition. Nobody is free to live everywhere; and whoever has to solve great problems that challenge all his strength actually has a very restricted choice in this matter. The influence of climate on our metabolism, its retardation, its acceleration, goes so far that a mistaken choice of place and climate can not only estrange a man from his task but can actually keep it from him: he never gets to see it.”
—Friedrich Nietzsche (1844–1900)