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Nº 745 - 21 de Octubre de 2005
Nº 745 - October 21st 2005
ISSN 0717-1528
ISSN 0717-1528
Market Concentration and the Economic
Model
In recent days, alarm has been expressed about the increased concentration of
the Chilean economy and the negative repercussions that this could have.
is possible to find highly efficient concentrated
markets.
The really worrying aspect, which affect small
and medium-sized companies above all, are
It has been stated that it is necessary to
the barriers, often bureaucratic and regulatory
reform the economic model and this is promotthat prevent and complicate the entry of new
ing inequality by encouraging
players into a market. These barrithe development of monopoers reduce the competitiveness of
lies to the detriment of small
our economy. Public policies ought
The
degree
of
and medium-sized compato be designed to reduce such barcompetition in an industry riers.
nies.
This is worrying as one
does not measure the degree
of competition in an industry
by the number of players that
participate in it. One cannot
infer that increased market
concentration in a certain industry means less competition.
cannot be measured by the
number of participants in a
Market Concentration: A
certain
market.
Market
concentration is one of the
Global Phenomenon
necessary conditions for the
existence of the monopoly or
In the first place, we should
a less competitive market note that this cycle of mergers and
but it is not sufficient.
increased market concentration underway in the Chilean economy is
part of a global process.
Market concentration is
one of the necessary conditions for the existence of a monopoly or a less competitive market but it is not sufficient. What really reduces
competition is the existence of barriers that impede the entry of a larger number of players.
In the United States at the
end of the nineteen nineties, for example, four
supermarket chains controlled 74%of the market in the 94 largest cities1.
Why has market concentration increased?
The process of market concentration responds to a need within an industry for companies to achieve an optimum size. In fact, economies open to international competition require
larger companies that can compete and survive in a global economy. As a consequence, it
In this
En
estaedition:
edición:


Possible reasons include:
• To develop economies of scale and
of scope. An increase in size can lead to cost
savings that occur through increased produc-
Marketde
Concentration
and theEconómico
Economic Model
Concentración
Empresas y Modelo
The
Creation
of
New
Regions
–
from the Municipalities
Creación de Nuevas Regiones, LeccionesLessons
de las Comunas
1
Cuadro Nº 1
Posición
en el Ranking
1
2
3
4
5
6
7
8
País
Estados Unidos
Alemania
Gran Bretaña
Japón
Francia
Suiza
Holanda
Italia
N° empresas
Grandes
48
10
9
8
8
6
6
5
GDP
per cápita (US$)
35.750
27.100
26.150
26.940
26.900
30.010
29.100
26.430
Fuente: Informe CIEN junio 2005. " ¿Necesita Chile más Empresas Grandes?"
tion (economies of scale) or that occur or become available by offering goods and services
together (economies of scope).
The CIEN study concluded that
the number of large companies
in our country remains low, given Chile’s per capita income. In
consequence, the level of market concentration in our country
remains low, relative to the rest
of the world. It also concluded
that the number of large companies (as categorized by the
Forbes Ranking) needs to increase if we want to increase
Chile’s per capita income to
around US$17,000 a year.
¿Does increased market
concentration reduce competition?
• To achieve the minimum efficient
size required in the industry. The rise of
globalization means companies have to compete internationally and not just within their
own countries. In order to succeed, they may
require a minimum size that allows them to
achieve the resulting economies of scale and
of scope. This should lead to lower costs and
lower prices for consumers.
No. Competition should not be measured
by the number of players that participate in the
market but according to the existence of free
movement into the market.
A market is not necessarily more competitive if the number of competitors is higher.
It is more competitive if there are no barriers which prevent new players entering the
market and if there is a higher number of substitutes for the product. This ensures that those
that offer the product in question cannot charge
prices much higher than those charged by the
competition or than the marginal cost of production over the long term.
A study by CIEN2 showed that the one
hundred largest companies in the 2000 Forbes
Ranking were found in eight countries which
had an average per capita income of
US$28,5473 and all belonged to the OECD.
Meanwhile, the 1,000 largest companies in this
ranking were distributed between 43 countries,
among them Chile (which was home to just
one of the 1.000 largest companies). Within
this group, 43 countries had an average per
capita income of US$20,027, more than double
Chile´s per capita income (US$9,820 a year)
(See Table N° 1).
Does increased market competition impede market competition?
2
charge less or because their product is superior.
Graph N° 1
INDICE DE MARGEN GLOBAL
1,20
1,00
0,80
IPC/IPM
0,60
Seen from another point of view,
greater market concentration and
larger companies are necessary to
achieve more efficient production,
by taking advantage of economies
of scale and allowing them to save
costs and to pass on these benefits to the consumers.
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
0,40
Source: By the author.
If increased market concentration is punished, companies could be penalized for operating more efficiently. The most
recent empiric evidence supports this alternate
hypothesis.
Two theories exist in economic literature
that attempt to explain the relationship between
market concentration and competition in an
industry. On one side, the Structure – Conduct
– Performance theory (Collusion Hypothesis),
which was widely accepted in the nineteen sixties, proposes that if an industry is highly concentrated, there are just a few or just one company with a very large market share,
competition will be weaker in the market
as these companies will control the market to the detriment of consumers. This
theory began to be questioned in the
nineteen seventies and little empiric evidence has been found to support the
theory.
The alternative hypothesis is
known as the Hypothesis of superior efficiency put forward by Harold Demsetz
at the beginnings of the nineteen seventies. This suggests that it is normal that
in all industries some companies are
more efficient than others, because they
use better technology or produce a better product. These companies tend to
dominate the market because they can
If they have a cost advantage,
charging a lower price means they
can enjoy a higher profits margin.
In consequence, increased market
concentration and profits are the
result of a cost advantage not due
to monopolistic behavior.
In consequence, it is not clear that a direct relation exists between increased market
competition and reduced competition. On the
Graph N° 2
Profitability of Sector (1997-2005)
Source: IPOM September 2005, Central Bank of Chile
3
contrary, two companies with equal or high
participation (around 70%) that operate in different markets can have more or less market
power depending on other characteristics, such
as: entry barriers to the market, the price elasticity of their rivals and the price elasticity of the
industry’s or the company’s demand.
direct margins calculated by the Central Bank
of Chile5.
This is the result of the high degree of
competition that exists between a few players
and which has benefited consumers. This is
especially true in the case of the country´s supermarkets. Increased competition has led to
lower prices while the sector’s profitability has
The case of Chile
fallen to just 9% (from more than 23% in
1997)6. (see graph N° 2). This is a return on
Numerous mergers have occurred in
profits that should considered normal for this
our country in recent years. Sectors including
sector and which has resulted in lower prices
airlines, pharmaceuticals, bankfor consumers. They should
ing, retail, etc have all underbe considered as the main
gone some form of concentraOne of the criticisms that beneficiaries of this increased
tion.
has been made of the Chilean competition.
economic model is that it
It is noteworthy that in difEmpiric evidence in the case
encourages
greater market
ferent sectors one or a handful
of Chile does not allow us
concentration, harming the
of companies enjoy large market
conclude that an inverse reladevelopment of small and
shares. For example, in the
tionship exists between marmedium-sized businesses.
banking sector, three banks conket concentration and compeThis
is
a
mistake.
The
problem
trol more half of the market, in
tition. On the contrary, in the
is
rather
than
barriers
telecommunications, one combanking sector, for example,
pany controls 75% of the market; complicate and slow the entry
we see that the levels of conof new players into the
among the chains of pharmacentration in our country are
cies, three companies control market. This affects small and
relatively low.
around a third of the market medium-sized companies to a
greater
degree.
each; the country´s two largest
The study by Levine7
supermarket chains compete
(2000), using data from 66
with each other and control more
countries for the period 1980 to 1995 showed
than half the market, etc.
that there was no relationship between the degree of concentration in the banking sector and
Is this a sign of reduced competition in
negative results in terms of the development of
the Chilean economy? This does not appear to
the banking sector, the degree of competition
be the case. On the contrary, on a global level,
within the industry, the integrity of the political
we can see that the margins charged to conand legal systems, economic growth and the
sumers have not increased although the cost
fragility of the banking sector. Meanwhile other
index has risen. In fact, if we look at the evolustudies show that Chile’s banking sector is not
tion of the global margin index for the Chilean
considered as highly concentrated, according
economy (see graph N° 1), we can see that
to international standards. Three largest banks
these have fallen in recent years. This means
control 41.9% of the sector’s assets (following
that the companies have become more effithe fusion of the Santander and Santiago
cient as they have not passed these increased
banks); this is significantly lower than the avercosts onto in consumers in the form of higher
age of 68% in the sample taken (see table N°
prices4. The same trend can be seen in the in2).
4
cessive profits. The problem in our country is
that barriers exist that complicate and slow the
entry of new players into the market. According
to a study by CIEN8 Chilean companies take
twice as long to complete the required bureaucratic procedures to begin operating. They
must spend four times as much as their international competitors just to begin operating.
They must carry out twice as many bureaucratic procedures.
Table N° 2
CONCENTRATION IN EUROPEAN BANKING
(Market share of the three largest banks
Austria
74.7%
83.2%
Belgium
85.3%
Switzerland
Germany
54.1%
Denmark
75.0%
Spain
50.8%
France
46.0%
United Kingdom
52.9%
Greece
83.5%
67.3%
Ireland
Italy
37.4%
Netherlands
83.3%
Norway
86.5%
Portugal
49.7%
Sweden
92.6%
AVERAGE
Chile (1)
Chile (2)
In fact, the results of the study show that
companies in Chile must assume costs equivalent to 10.2% of gross national income and require around a month to complete the necessary procedures (of which there are around 8).
In the United States, meanwhile, the cost is
just 0.6% of gross national income and the
procedures (just 2) take three days to be completed.
68.2%
33.3%
41.9%
(1) Market Concentration in Chile to January 2000.
Meanwhile, World Bank studies show
that in those countries with a large number of
large companies the difference in wages paid
by large and small companies for the same
sort of work are smaller. In more developed
countries with more large companies, the differences in wages (between large and small
countries) is around 35% while in developing
companies with a smaller number of large
companies the differences in wages (between
small and large companies) for the same kind
of work is around 50%.
(2) After the merger of the Santiago and Santander banks.
Source: Vergara y Asociados Ltda. "Market Concentration
And Free Competition in Chilean Banking Sector",
May 2000.
We should also remember that should a
company abuse its dominant market position, it
will have to face the Free Competition Court,
an independent and technically competent institution that protects free competition in the
markets. Another step would be to make the
National Economic Regulator independent of
the government in power.
Conclusions
Market Concentration and Small and
Medium-sized Companies
This phenomenon of mergers and increased concentration in the Chilean economy
should not be seen as something negative.
This is the result of an economy that is integrated into a globalized world and is a sign of
competition. In order to compete in a globalized world, Chilean companies need to achieve
an optimum size to take advantage of economies of scale and to be able to compete with
the rest of the world. What should concern is
how to ensure that small and medium-sized
companies can also participate in the national
One of the criticisms that has been made
of the increased market concentration is that it
harms the development of small and mediumsized businesses.
This is a mistake. In a competitive market, the principle threat to anyone who wants to
abuse their dominant position is the entry of
new players, attracted by this company’s ex-
5
and global economies. This will require us to
reduce entry barriers, many which are bureaucratic and regulatory in nature, that prevent
and hinder the entrance of new small actors
into markets. These reduce the competitiveness of our economy and it is these which
need to be modified, not the Chilean economic
system or model. 
1 Sources: Enfoques, El Mercurio, Sunday, October 16th 2005.
2 See CIEN Report (Business and Economics Research Center), June 2005. “Does Chile Need More Big
Companies?”
3 Per capita GDP adjusted for PPP.
4 On average, the IPC has varied by 7.5% each
year during the period 1990 to 2004. IPM has averaged
7.7% over the same period. Clearly there is an upward
trend in the IPM between 1999 and 2003 and a downward trend in the IPC from 1998 onwards.
5 See the Monetary Policy Report for September
2005, page 60. The Central Bank of Chile.
6 See the Monetary Policy Report for September
2005, page 48. The Central Bank of Chile.
7 See Ross Levine, Bank Concentration: Chile and
International Comparisons, Central Bank of Chile, Working Papers, N°62, January 2000
8 See CIEN Report, July 2005. “Chilean small and
medium-sized companies take twice as long to start a
business as the foreign competition.”.
6