industry, which is representative of market structure. Profit is typically expressed as the product of a profit/revenue, profit/equity, or profit/total assets ratio. Concentration is typically expressed as the proportion of total industry activity for which a predetermined number of firms within the industry account.
Market structure is typically defined within the context of four variablesù(1) seller concentration, (2) product differentiation, (3) barriers to entry, and (4) barriers to exit. Product differentiation, barriers to entry into an industry, and barriers to exit from an industry also affect market structure. These factors are considered in the following section of this chapterù"Barriers to Competition."
Seller concentration refers to both the number of firms participating in a market, and the size of those firms in relation to one another. Seller concentration is most often measured within the context of market share, although at times such measurement may reflect aggregate concentration within the contexts of assets, value added, profits, employment, or any of a number of other indicators. Seller concentration is high in the American tobacco products manufacturing industry.
Concentration is typically expressed as the proportion of total industry sales controlled by a specified number of firms. In the United States, the numbers typically specified are either four or eight, while in the United Kingdom, the number is usually five to indicate an industry that is characterized by oligopoly.
Some analysts include explanatory or modifying variables other than industry concentration in the equation. These additional explanatory and modifying variables may be measures of (1) barriers to entry, (2) import-export activity, (3) firm size, (4) growth rates, (5) risk differentials, (6) productive efficiency, and (7) advertising levels in the industry. Which, if any, of the additional variables may be included in...