Chapter 21: Problem 757

What is economic concentration?

Short Answer

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Economic concentration refers to the dominance of a small number of firms within a particular industry or market. This can occur due to factors such as economies of scale, barriers to entry, mergers and acquisitions, and access to resources. Industries like technology, telecommunications, and pharmaceuticals often exhibit high economic concentration. While it can lead to lower prices and increased innovation, it may also result in reduced competition, limited consumer choice, and increased income inequality.

Step by step solution

Define Economic Concentration

Economic concentration is a measure of the extent to which a small number of firms, usually large corporations, dominate a particular industry or market. This occurs when these few firms control a significant share of the total production, sales, or distribution within the industry.

Explain Reasons for Economic Concentration

There are various reasons why economic concentration may occur. Some of these factors include: 1. Economies of scale: Large firms may reap the benefits of lower per-unit costs as they increase in size. 2. Barriers to entry: High entry barriers, such as significant initial investments, regulations, or patents, can prevent new firms from entering the market, allowing existing firms to maintain a dominant position. 3. Mergers and acquisitions: When firms merge or acquire other firms, they can increase their market share and presence within an industry. 4. Access to resources: Firms with exclusive access to key resources or technologies can maintain a dominant position.

Give Examples of Industries with High Economic Concentration

Some examples of industries with high economic concentration include: 1. Technology: A few major companies, like Apple, Microsoft, and Google, dominate the market for operating systems and software. 2. Telecommunications: In many countries, a small number of large providers control the market for mobile phone and internet services. 3. Pharmaceuticals: A handful of global pharmaceutical companies control a significant share of drug development and sales.

Discuss the Implications of Economic Concentration

Economic concentration can have both positive and negative impacts on a market and its consumers. Positive implications may include lower prices due to economies of scale and increased innovation in search of market dominance. However, negative implications may include reduced competition, leading to limited choice for consumers, pricing power, and potential collusion among dominant firms. Economic concentration can also result in income and wealth inequality as profits concentrate amongst the few dominant firms and their shareholders. By understanding economic concentration, we can better analyze market structures and consider the implications it might have on both consumers and the overall economy.

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