In many industries, such as banking, health insurance, internet search engines, pharmaceuticals, social media and telecommunications, there have been increases in market concentration - Edexcel - A-Level Economics A - Question 8 - 2021 - Paper 1

Increased market concentration often leads to oligopoly market structures where a few firms dominate the market. This can significantly impact business decision making in various ways:

High Concentration Ratio

Business leaders must consider the actions of their few competitors. The decisions made by these firms can significantly shape the strategies of others, leading to a highly interdependent decision-making environment.

Monopoly Power

Firms may engage in limiting choices available to consumers, which can enhance profit margins but reduce overall market competition. This can result in predatory pricing strategies or product differentiation aimed at establishing a brand loyalty that discourages consumer switching.

Price Leadership and Collusion

High concentration can lead to price leadership where one firm sets the price and others follow, which can reduce competition. Collusion may also occur, where firms agree to fix prices or limit output, ultimately harming consumer welfare.

Increased Barriers to Entry

With high concentration, existing firms can erect substantial barriers for new entrants, maintaining their market control. This can stifle innovation and limit market options for consumers.

Regulatory Scrutiny

Firms in highly concentrated markets may face increased scrutiny and regulations from government bodies. These regulations can limit the scope of business strategies and complicate decision making.

Non-price Competition

In concentrated markets, firms often engage in non-price competition, enhancing their products or improving service standards to retain customer loyalty rather than competing solely on price.

Dynamic Efficiency

In the long run, the lack of competition may lead to reduced incentives for firms to innovate, potentially resulting in a loss of dynamic efficiency, where firms are no longer motivated to invest in new technologies or improvements.

Conclusion

In conclusion, while increased market concentration can lead to higher short-term profit margins, it poses significant risks to long-term strategic decision-making, inter-firm relationships, and overall market health.