Concentration Matrix

TL;DR

• Identifies which firms dominate a market and measures how concentrated the market is.
• Uses quantitative measures (for example, the Herfindahl-Hirschman Index) or strategic frameworks (for example, Porter’s Five Forces).
• Helps inform antitrust analysis and firms’ strategic positioning and growth decisions.

Definition

A concentration matrix is a tool used to analyze the degree of concentration within a market or industry. It is typically used to identify the dominant players in the market and assess the level of competition.

Explanation

Concentration matrices provide ways to evaluate how market share is distributed among firms and to assess competitive intensity. They can take the form of numerical indices that aggregate firms’ market shares or of conceptual frameworks that examine competitive forces. By revealing dominant players and the competitive dynamics, concentration matrices support analysis of market structure and competitive threats.

Examples

Herfindahl-Hirschman Index (HHI)

The Herfindahl-Hirschman Index is a commonly used concentration measure, often applied in antitrust cases to determine the level of concentration in a market. The HHI is calculated by adding the squared market share of each firm in the market:

$$HHI = \sum_i s_i^2$$

For example, if a market consists of four firms with market shares of 25%, 25%, 25%, and 25%, the HHI would be 2,000, indicating a high level of concentration.

Five Forces model

The Five Forces model, developed by Michael Porter, evaluates the level of competition in an industry by examining:

• the intensity of rivalry among existing firms,
• the threat of new entrants,
• the bargaining power of suppliers and buyers, and
• the threat of substitute products or services.

This model can be used to assess the level of concentration in an industry, as well as the potential for new entrants and the bargaining power of different players in the market.

Use cases

• Used in antitrust cases to determine the level of concentration in a market.
• Assessing the competitive landscape to identify dominant players and the intensity of competition.
• Informing firms’ strategic positioning and decisions about potential for growth.

Related terms

• Herfindahl-Hirschman Index (HHI)
• Five Forces (Porter)
• Antitrust