Civil Engineering Reference
In-Depth Information
means that the top five firms account for 72 per cent of this industry's sales. In
the statistical material published by the Office for National Statistics (ONS) the
variables used to calculate the five-firm concentration ratio are gross value added
and output. In other words, the gross value added and the volume of output
of the top five businesses are measured as a proportion of the total turnover and
total output of the industry. The series is based on the
Annual Business Enquiry
and Input-Output Analyses
. Note, however, before considering examples, that the
precise definition of any specific industry is somewhat arbitrary and, consequently,
as we narrow the definition of an industry the concentration ratio rises, and vice
versa. Also conventional measures include only domestic production, and if foreign
competition is a significant presence, the actual market concentration will be much
lower than indicated by the ratios.
Table 7.4
Concentration ratios by industry (in 2004)
Five-firm concentration ratio
Industry
GVA (%)
Output (%)
Construction
5
48
74
5
61
71
Iron and steel
Cement, lime and plaster
Metal boiler and radiator
51
45
Source:
Input-output analysis
(ONS, 2006: Table 8.31)
Table 7.4
gives the five-firm concentration ratio for four industries. As noted,
the more precise the definition of an industry the higher the ratio. Consequently,
the broad industrial classification of construction produces a very low concentration
ratio, as both total production and turnover (gross value added) are dominated
by small businesses. In fact, as we pointed out in
Chapter 6
there are more than
220,000 enterprises comprising the construction industry - responsible for
all the gross value added and output of the UK construction firms. However,
if we define house building as a separate industrial sector then it becomes a
more concentrated market - the top five house builders account for more than
65 per cent of the gross value added by all the house builders across Great Britain.
This increases the opportunities to benefit from economies of scale and changes the
nature of competition. Indeed, house building at the regional and local level often
allows businesses to act like firms operating in an oligopoly, as the number of
competing firms at this level will be quite small. The bigger house building firms in
an area should be able to control the price and quality expected in that marketplace.
Table 7.4
also shows that the five-firm concentration ratio for iron and steel
output is 61 per cent, and such a high figure would be expected in an industry based
around a specific production process that requires heavy plant and machinery.
However, this concentration ratio has fallen in recent years due to structural changes
experienced by the iron and steel sector, caused in part by an increase in foreign
