Industrial Economics and Concentration Ratio - Essay Example

GRADE 3rdMAY Part year 2000 2001 2002 2003 2004 2005 Buena Warner Universal Sony Paramount 20thCentuary Others 15.5 13 13.1 13.9 14.9 13.1 16.4 13.9 13.7 11.0 20.0 12.0 11.6 17.8 19.4 19.8 11.7 19.1 9.9 14.2 5.9 16.3 18.5 13.9 17.5 9.3 10.7 12.7 19.3 16.1 12.5 9.2 13.9 9.4 19.6 19.0 16.3 12.5 12.8 10.0 7.6 21.8 CR4 CR6 CR8 57.4 83.6 90.8 59.6 82.2 88.5 72.5 94.1 97.4 66.2 87.3 92.5 61.8 80.4 90.4 60.6 78.2 91.0 Herfindahl 1200 1204 1577 1333 1367 1335 Table 3: Market Shares of Major Distributors, 2000-2005 A concentration ratio measures the total output in an industry produced by a given number of large firms. The four-firm concentration ratio measures the output that is produced by four top firms in an industry. There are six firm concentration ratios and eight firm concentration ratios. Concentration ratio is usually used to measure the extent of oligopoly and the degree to which the largest firms control a market. Concentration ratios are calculated depending on the largest firms’ market shares. If 90 percent of industry is produced by four largest firms, then hat indicates an oligopoly and the four firms have a good market share (Curry and George, 1983). At the low end concentration, a zero percent concentration means that there is perfect competition meaning the number of firms is too large that the largest firms have no percentage of the market. On the other hand, 100 percent concentration ratio implies that there is a concentrated oligopoly. It therefore, means, there is monopoly. 0 to 50 percent concentration ratio can be interpreted as a low concentrated industry. In this, oligopoly is at the top while monopolistic competition falls at the bottom. Medium concentration takes a 50 to 80 percent concentration and is considered to be very much oligopolistic. High concentration ranges from 80 to 100 percent concentration (Curry and George, 1983). In the table above, considering the top four companies, the concentration ratio ranges between 50 to 80 percent, suggesting a standard concentration and a diffident degree of rivalry. This can be considered to be oligopolistic. The top six companies’ concentration ranges between 70 to 90 percent concentration, with 78.2 being the lowest. This indicates a high concentration of firms and thus medium oligopoly. Concentration ratios of eight firms range from 88.5 to 97.4. Concentrations are on the upper end indicating high oligopoly almost coming to a monopolistic market structure. From the data above, considering the concentration ratios, it shows that in the first two years, there is less oligopoly. It then increases in the year 2002 where it is at highest. Then due to high turnover, there are more firms joining the industry which causes the concentration ratios to lower reducing oligopoly. Herfindahl-Hirschman Index (HHI) is another measure of market concentration. In calculating it, the market split of each company that is competing in the market is squared, then summing the results. It can range from zero to 10,000. The higher the market’s concentration, the closer it is to being a monopoly and the less competitive it is (Curry and George, 1983). Considering the investigations conducted, it showed that the market concentration is highest in the year 2002 which is 1577, and it is lowest in year 2000. This indicates that the market was less competitive in the year 2002 than in 2000 which were more competitive. The competition then increases from 2003, goes down in the following year then starts to decline again. Since the market’s results ranges from 1,000 to 1,800, it can be termed as a moderately concentrated market. We can therefore, conclude that it has some oligopoly. To what extent do the major studios - those named in the CR4, CR6 and CR8 indices - outperform the market? In the economic model, competition among firms that are rivals reduces profits to zero. But competition is imperfect and firms are not price takers. Industry concentration is used to measure rivalry. A high concentration ratio shows most of the market share is held by the largest firms. A concentration ratio indicates that the industry has many rivals where none of them has a significant share of the market. If rivalry is low, then the industry is said to be disciplined, which may result from the industry’s history of competition, or what the leading firm’s role is or firms complying with the understood code of conduct. Most businesses trade in more than one product; they will trade in several similar products that are preferred by different customers. This is called a product portfolio. The advantage of a product portfolio is; there is spread of risks as a decline of sale of one product may be offset by the sale of others. Another advantage is that it will generate more returns to the firm, and the range of products can also be sold to different consumers. For a studio to be a major player, it needs to have diversified portfolios. Mike pokorny, in a series of publications argues that, the prerequisite has not changed since 1920. There is portfolio effect in the film industry indicated by the way, the firms engage in a variety of products. The films are ranked differently; and the leading firms trade in all of them. Every once a week every distributor had a top movie. In applying portfolio, the largest firms will deter other firms from entry. This may lead in low quality products being traded. The industry will be risking to losing its customers to other industries. When entry is restricted, low quality products in the first period are produced leading to consumers purchasing goods at lower prices. The company will be risking a low turnover. In the second period however, there is no occurrence of high quality market. Consumers thus face prices that are high in the second phase because the inefficient incumbent still produces high quality variant. The movie producers have no direct access to the moviegoers and they reach them through the distributors. There is therefore, competition among the producers for space in the distributors’ premises. The producer is not able to predict the demand of his movie and so what rank it will take. Having a variety of movies will be able to sustain him in the market and be able to compete favorably. Films can be in two differentiated varieties. The market’s low end is very competitive, and the movie variety is being produced by a large number of producers with the same marginal cost. An incumbent producer who produces unique high quality movies incurs more cost since more sophisticated technology is required and more marketing. The incumbent may also be in a position to produce the variant that is low in quality. The risk here is that the producer is incurring costs and he does not know the reactions of the consumers. Incase the producer sells high quality films, he may try to increase the entry cost by lowering the price of his films. If the price is lowered enough, the demand of the low cost films will decline when vended at a similar price as the lofty quality one. The producer risks by lowering the demand for the quality product and his revenue. Film industry may be distinctive but not isolated. The studios have horizontal as well as vertical relations with a series of software and hardware industries with spillover effect. This inter-industry relation has effect on the risk environment. To investigate how market share is tied to profitability among the largest firms, we take a week by week record of the first and second ranked distributors. Only a few distributors in the picture industry take the first two ranks. Fifty three distributors are used in the sample, and only eight occupied the one of the first two ranks. These are; Beuna Vista, Paramount, Sony, universal, 20th Century, Miramax, Warner Bros., and Newline. Every once a week every, a distributor had a top movie. Ranks 1 and 2 are mostly attained by a film during its first week; there is persistence in maintaining a top rank. Fox held the top spot 12 times in the 55 weeks; Paramount 11 times and Sony managed 9 times. Buena Vista held it 7 times. The number one rank was held by Fox for five weeks in a row for the longest time; it also had a four week winning which is marched by Paramount (De Vany et al., 1991). The importance of rank one and two is shown by the relationship between the number of screens and box revenues and rank. The distributors that are ranked high posses disproportionately a large share of theatre screens and box office revenues. The turn over in firms that are taking first and second rank and the brief occupancy shows that competition between major distributors is very high (De Vany et al., 1991). According to the above investigation, it shows that there is a portfolio effect. It is shown by; the film industry is dynamic and therefore, needs a regular supply that adapts to demand over time. This is because the movie goers decide on the movie depending on the sources of information. The theater engagement and the length of run depends on the demand so supply is not used to influence rental prices and admission The Courtnot hypothesis that firms are in a position to make conjectures on the responses of their competitors to their decision on supply is implausible. It is impossible to know what a movie is worth before it is released; demand is unknown and the theater screens needed and the running length are changed as the film runs. A firm is not able to predict its share of the market nor can it fore see a change in its market share from the actions of the rivals. The firms have vague ideas on the elasticity of demand for the films. The price-cost margin, the crucial element in the theory linking concentration to market power, is different in the film industry. There are three prices in the film industry and they are not determined by the distributor. They change with demand and supply. These prices are; exhibition ticket price which is set by the exhibitor and it is constant as the movie runs so as curb incentive problem to have a pure demand signal. The film rental rate is the other one; it sets payment to the distributor from the theater. The rate is adjusted every week and it depends on the state of demand. Hence, it also is a form of pricing that is adaptive determined by the filmgoers’ attendance to the movies. It therefore, means that the rental price is not set before a film plays and will adjust to demand as the film plays. Third price is the distributor’s service price; it is the percentage of gross film rentals. The distribution fee varies with the demand and the highly demanded moves will earn high fees. Distribution and rental fees therefore, can not be known. Neither the distributor nor the producer can know before the demand of a movie is known. Fixed number of copies and prints are released and the first distribution made, so there is small marginal cost of accommodating higher demand. The marginal cost of increasing the run is the opportunity cost of the profit the distributor forgoes and on the other screen another theater could be playing. Thus, the distributors’ price cost margin increases with the increase in film rental. The response of exhibitors and distributors to the supply occurs mainly through adjusting the length of run and this adaptively is determined by the response to the demand realized during the run. The length of the run of a film is known when it is released so distributors are unable to form conjectures on how their own films affects those of the other distributors. The most they can do to avoid movies being ‘’block busters’’ is to move the opening dates because this could reduce their films’ revenues. The distributors will be doing a guessing game since they do not know which films will be blockbusters or if other distributors will change their opening dates also and for how long the competitive film will play. REFERENCES Curry, B. and George, K. 1983, “Industrial Concentration: A Survey”, Journal of Industrial Economics. 31 (3): 203-55. De Vany, A. and Eckert, Ross D. 1991. “Motion Picture Antitrust: The Paramount Cases Revisited”, Research in Law and Economics. 14: 51–112. De Vany, A. and Walls, W. (1996), “Bose-Einstein Dynamics and Adaptive Contracting in the Motion Picture Industry” Economic Journal, 439(106): 1493–1514 De Vany, A. 1999. “Uncertainty in the Movie Industry: Does Star Power Reduce the Terror of the Box Office?” Journal of Cultural Economics 23(4): 285–318 Fisher, Franklin M, 1987. “Horizontal Mergers: Triage and Treatment”, Economic Perspectives, 1(2): 23-40. Read More