Group 3 Section A
Group 3 Section A
Group 3 Section A
Submitted By
GROUP 3
Vaibhav 22A1HP002
Shibbudevi Hariprasad Tiwari 22A1HP017
Puspa Rani 22A1HP021
Rupam Chakraborty 22A1HP031
Sachin Godbole 22A1HP085
Deep Manash Gupta 22A1HP088
Lavanya Thakur 22A1HP150
Submitted To
Prof. (DR.) Avishek Bhandari
Introduction:
For managers to make decisions, they must analyse an industry's market structure. And in
doing so, we must find these industries' market concentration. Some industries are
controlled by a few large firms, while others consist of many small firms. To gauge the
degree of concentration in an industry, we use different concentration ratios like "The four-
firm concentration ratio" and "The Herfindahl-Hirschman Index (HHI)".
The Five industries in which our studies are based are:
a) Power Transmission
b) Refinery
c) Steel
d) Shipping
e) Consumer Durables.
Objective:
To infer the market structure of Five industries (Power Transmission, Steel, Shipping,
Refinery and Consumer Durables) depending on their industry concentration, calculated
using C4 and HHI.
Methodology:
We have made use of "The four-firm concentration ratio" and "The Herfindahl-Hirschman
Index (HHI)."
1. The four-firm concentration ratio tells us about the percentage of industry sales
that comes from the four largest firms in that Industry
Concentration Ratio Formula
HHI = ∑ S 2n
1
C4 Index
120%
100%
80%
60%
40%
20%
0%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
HHI Index
4500.00
4000.00
3500.00
3000.00
2500.00
2000.00
1500.00
1000.00
500.00
0.00
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
We observe the following results:
The power transmission industry has extremely high C4 values, and the Consumer
durable industry has the lowest C4 value range among the five chosen industries.
The concentration ratio tells us about the degree of competition in an industry.
Since for the industries of power transmission, refinery, and steel, we observe
very high C4 values (in the range of 90% to 97%), we can say that these three
industries are highly concentrated. This means that markets in these
industries have very little competition among producers for sales to
consumers.
We can also say that for these three industries, there is a state of oligopoly in
the market since the top 4 firms in these industries have more than 90% of
total market sales/share.
For the shipping industry, the range of C4 lies between (74 - 63) %, and
hence it is moderately concentrated.
For the consumer durables industry, the concentration goes down to 58%,
indicating moderate to low concentration. Thus, this Industry is almost
perfectly competitive. Thus, there is high competition among the producers
here for sales to consumers. It also indicates that this Industry probably has
free entry and exit.
As per the HHI values, we observe that it has a similar trend to that of the C4 values,
with Power transmission and steel being the two industries having the highest HHI
values among the five industries we have studied. This is followed by the refinery,
shipping and Consumer durables (in that order).
An industry with an HHI score of above 2500 is highly concentrated, while those
below 1500 are considered to have low concentration and hence competitive.
Power Transmission, Refinery, and Steel have HHI values ranging from 4035 to
2674; thus, we see that these three industries are highly concentrated.
This could be because an industry like steel, whose top players are companies
like Tata Steel and JSW Steel, continue to acquire financially weaker companies
in that same Industry since they are becoming bankrupt. And thus, the Industry
is becoming less competitive day by day.
Similarly, there are very few players in an Industry like power transmission due to
the nature of this Industry. This Industry tends to become an oligopoly due to high
start-up and infrastructural costs and other barriers to entry. And thus, market
power is concentrated in very few hands.
Shipping Industry has an HHI score ranging between 2075 and 1341; hence we can
infer that they are moderately concentrated.
The Consumer Durables industry has low concentration as their HHI values range
from 1802 to 1408. This means that the industry is a competitive one, and there is
a large number of sellers in the Industry, and hence it tends to become a
perfectly competitive market.
Limitations: Both the concentration ratios can lead to inaccurate results if not interpreted
with caution, and hence it is essential to take care of the following limitations:
Conclusion:
With the help of concentration ratios, we can predict the overall market dominance within an
industry. It helps us determine whether the industry is perfectly competitive, oligopoly,
monopoly, or facing monopolistic competition.
In our inference, we saw that for almost all industries, the industries with higher C4
values also have higher HHI values. Thus, a similar pattern is revealed in both cases.
Although it gives us a good framework, it is essential to be careful about its limitations as it
only provides us with a crude measure of the size and structure of an industry. Thus, it is
prudent to remain cautious when using and interpreting these ratios.