Economics

competitive tender an invitation for private sector firms to submit TENDERS (price bids) for contracts to supply goods or services to the public sector which the public sector has traditionally supplied for itself. Competitive tendering seeks to introduce competition in the provision of goods or services and thus reduce the costs to government departments, local authorities and health authorities. See DEREGULATION.

competitor a business rival of a firm supplying a good or service that offers buyers an identical or similar product. See COMPETITION, COMPETITIVE ADVANTAGE, COMPETITIVE STRATEGY, PRODUCT DIFFERENTIATION.

complementary products GOODS or SERVICES whose demands are interrelated (a joint demand) so that an increase in the price of one of the goods results in a fall in the demand for the other. For example, if the price of tennis rackets goes up, this results not only in a decrease in the demand for rackets but, because less tennis is now played, a fall also in the demand for tennis balls. See SUBSTITUTE PRODUCTS, CROSS-ELASTICITY OF DEMAND.

complete contract see CONTRACT.

complex monopoly a situation defined by UK COMPETITION POLICY as one in which two or more suppliers of a particular product restrict competition between themselves. ‘Complex monopoly’ in essence refers to an OLIGOPOLY situation where the firms concerned, although pursuing individual (i.e. non-collusive) policies, nonetheless behave in a uniform manner and produce a result that is non-competitive (i.e. similar to COLLUSION). The problem is that it is often difficult to distinguish between competitive and non-competitive situations. For example, if firms charge identical prices, is this reflective of competition (i.e. prices that are brought together because of competition) or a deliberate suppression of competition?

compound interest the INTEREST on a LOAN that is based not only on the original amount of the loan but the amount of the loan plus previous accumulated interest. This means that, over time, interest charges grow exponentially; for example, a £100 loan earning compound interest at 10% per annum would accumulate to £110 at the end of the first year and £121 at the end of the second year, etc., based on the formula: compound sum = principal (1 + interest rate)

that is, 121 = 100 (1 + 0.1)

.

Compare SIMPLE INTEREST.

computer an electronic/electromechanical device that accepts alphabetical and numerical data in a predetermined form, stores and processes this data according to instructions contained in a computer program, and presents the analysed data.

Computers have dramatically improved the productivity of data processing in commerce and business; for example, computer-aided design and computer-aided manufacturing systems have improved the speed and cost with which new components or products can be assigned and subsequently scheduled for production; computer-aided distribution and stock control systems such as ELECTRONIC POINT OF SALE (EPOS) have helped to minimize stockholdings and have improved customer services; computers have rapidly taken over the manual tasks of keeping accounting records such as company sales and payroll. Computers have also played a prominent role in speeding up the response of commodity and financial markets to changing demand and supply conditions by processing and reporting transactions quickly.

In recent years computers have underpinned the rapid expansion of E-COMMERCE using the INTERNET. See STOCK EXCHANGE, AUTOMATION, MASS PRODUCTION.

concealed unemployment see DISGUISED UNEMPLOYMENT.

concentration measures

The measures of the size distribution of firms engaged in economic activities.

The broadest concentration measure is the aggregate concentration measure, which looks at the share of total activity in an economy accounted for by the larger firms, for example, the proportion of total industrial output accounted for by the largest 200 firms; or the share of total manufacturing output produced by the 100 largest companies. Various size criteria may be used for this measure, in particular, sales, output, numbers employed and capital employed, each of which can give slightly different results because of differences in capital intensity. Such measures serve to give an overall national view of concentration and how it is changing over time.

Although aggregate concentration measures are useful, they are generally too broad for purposes of economic analysis where interest focuses upon markets and performance in these markets. Consequently, economists have developed several measures of MARKET concentration that seek to measure SELLER or BUYER CONCENTRATION. The most common of these measures is the CONCENTRATION RATIO, which records the percentage of a market’s sales accounted for by a given number of the largest firms in that market. In the UK it has been usual to estimate the concentration ratio for the three or (more recently) five largest firms, whereas in the USA the four-firm concentration ratio tends to be employed.

Fig. 28 Concentration measures. (a) Cumulative concentration curves, showing the cumulative share of market size accounted for by various (cumulative) numbers of firms. (b) The Lorenz curve shows the cumulative share of market size on one axis accounted for by various (cumulative) percentages of the number of firms in the market.

The concentration ratio, however, records only seller concentration at one point along the cumulative concentration curve, as Fig. 28 (a) indicates. This makes it difficult to compare concentration curves for two different markets, like A and B in the figure, where their concentration curves intersect. For example, using a three-firm concentration ratio, market A is more concentrated while using a five-firm ratio shows market B to be more concentrated. An alternative concentration index, called the HERFINDAHL INDEX, gets around this problem by taking into account the number and market shares of all firms in the market. The Herfindahl index is calculated by summing the squared market shares of all firms. The index can vary between a value of zero (where there are a large number of equally sized firms) and one (where there is just one firm).

Concentration measures, like the concentration ratio and the Herfindahl index, are known as absolute concentration measures since they are concerned with the market shares of a given (absolute) number of firms. By contrast, relative concentration measures are concerned with inequalities in the share of total firms producing for the market. Such irregularities can be recorded in the form of a Lorenz curve as in Fig. 28 (b). The diagonal straight line shows what a distribution of complete equality in firm shares would look like, so the extent to which the Lorenz curve deviates from this line gives an indication of relative seller concentration. For example, the diagonal line shows how we might expect 50% of market sales to be accounted for by 50% of the total firms, whilst in fact 50% of market sales are accounted for by the largest 25% of total firms, as the Lorenz curve indicates. The Gini coefficient provides a summary measure of the extent to which the Lorenz curve for a particular market deviates from the linear diagonal. It indicates the extent of the bow-shaped area in the figure by dividing the shaded area below the Lorenz curve by the area above the line of equality. The value of the Gini coefficient ranges from zero (complete equality) to one (complete inequality).

In practice, most market concentration studies use concentration ratios calculated from data derived from the census of production.

Concentration measures are widely used in economic analysis and for purposes of applying COMPETITION POLICY to indicate the degree of competition or monopolization present in a market. They need to be treated with caution, however. On the one hand, they may overstate the extent of monopolization. First, the boundaries of the market may be defined too narrowly (for example, the ‘beer market’) when it might be more appropriate to adopt a wider interpretation of what constitutes the relevant market by including actual and potential substitutes (for example, the ‘alcoholic drink market’, which includes also spirits and wines). Thus, calculating a firm’s market share in terms of the beer market alone may make it seem more powerful than it actually is. Secondly, concentration ratios are usually compiled by reference to the output of domestic suppliers, thus ignoring the competition afforded by imports. Thirdly, market concentration is only one element of market structure. If BARRIERS TO ENTRY to the market are relatively low, or suppliers are confronted by powerful buyers, again the market may well be much more competitive than shown by the concentration ratio. On the other hand, concentration ratios may understate the degree of monopolization. First, the market may be defined too broadly when a narrower specification of the market’s boundaries may be more appropriate. This can be important in the context of suppliers who deliberately choose to ‘focus’ on a narrow segment of the market (see COMPETITIVE STRATEGY). Secondly, conduct elements as well as structure variables need to be considered. For example, while superficially a market with a low or moderate degree of seller concentration may appear to be competitive, in practice it may be highly monopolistic because the suppliers have set up a price-fixing CARTEL.

Thus, looked at ‘in the round’, concentration ratios are but one aspect in examining the dynamics of a market and whether or not it exhibits competitive or monopolistic tendencies.

concentration ratio a measure of the degree of SELLER CONCENTRATION in a MARKET. The concentration ratio shows the percentage of market sales accounted for by, for example, the largest four firms or largest eight firms. The concentration ratio is derived from the market concentration curve, which can be plotted on a graph, with the horizontal scale showing the number of firms cumulated from the largest size and the vertical scale showing the cumulative percentage of market sales accounted for by particular numbers of firms. See Fig. 29. See CONCENTRATION MEASURES, MARKET STRUCTURE.

Fig. 29 Concentration ratio. Market A is here highly concentrated, with the four largest firms accounting for 80% of market sales, while market B has a relatively low level of concentration.

concerted practica a situation defined by European Union and UK competition law as one where rival firms, without engaging in formal COLLUSION (see ANTI-COMPETITIVE AGREEMENT), nonetheless informally coordinate their behaviour in respect of selling prices and discounts, and engage in market-sharing and joint capacity adjustments.

Under the EU’s Article 85 of the Treaty of Rome and the UK’s COMPETITION ACT 1998, concerted practices are prohibited outright. See COMPETITION POLICY (EU), COMPETITION POLICY (UK).

concert party a group of individuals or firms that acts ‘in concert’, pooling its various resources in order to effect the TAKEOVER of a company. See TAKEOVER BID, CITY CODE.

conciliation a procedure for settling disputes, most notably INDUSTRIAL DISPUTES, in which a neutral third party meets with the disputants and endeavours to help them resolve their differences and reach agreement through continued negotiation. In the UK the ADVISORY CONCILIATION AND ARBITRATION SERVICE acts in this capacity. See MEDIATION, ARBITRATION, INDUSTRIAL RELATIONS, COLLECTIVE BARGAINING.

condition of entry an element of MARKET STRUCTURE that refers to the ease or difficulty new suppliers face in entering a market. Market theory indicates that, at one extreme, entry may be entirely ‘free’, with, as in PERFECT COMPETITION, new suppliers being able to enter the market and compete immediately on equal terms with established firms; at the other extreme, in OLIGOPOLY and MONOPOLY markets, BARRIERS TO ENTRY operate, which severely limit the opportunity for new entry. The significance of barriers to entry in market theory is that they allow established firms to secure a long-term profit return in excess of the NORMAL PROFIT equilibrium attained under fully competitive (‘free’ entry) conditions. See MARKET ENTRY, POTENTIAL ENTRANT, LIMIT PRICING.

Confederation of British Industry (CBI) a UK organization that represents the collective interests of member companies in dealings with government and TRADE UNIONS.

congestion charge see ROAD CONGESTION.

conglomerate firm see FIRM.

consolidated fund the UK government’s account at the BANK OF ENGLAND into which it pays its TAXATION and other receipts, and which it uses to make payments.

consolsabbrev. of consolidated stock; government BONDS that have an indefinite life rather than a specific maturity date. People acquire consols in order to buy a future nominal annual income without any expectation of repayment of the issue, though they can be bought and sold on the STOCK EXCHANGE. Because they are never redeemed by the government, the market value of consols can vary greatly in order to bring their EFFECTIVE INTEREST RATE in line with their NOMINAL INTEREST RATE. For example, £100 of consols with a nominal rate of interest of 5% would yield a return of £5 per year. If current market interest rates were 10%, then the market price of the consols would need to fall to £50 so that a buyer would earn an effective return on them of £5/£50 = 10%.

consortium a temporary grouping of independent firms, organizations and governments brought together to pool their resources and skills in order to undertake a particular project such as a major construction programme or the building of an aircraft, or to combine their buying power in bulk-buying factor inputs.

conspicuous consumption the CONSUMPTION of goods and services not for the UTILITY derived from their use but for the utility derived from the ostentatious exhibition of such goods and services.

A person may buy and run a Rolls-Royce motor car not just as a vehicle for transportation but because it suggests to the outside world something about the owner. That person may wish to be seen as affluent or as a person of taste. This phenomenon (known as the VEBLEN EFFECT) can be viewed as an alternative to the more usual consumption theories where the quantity of a particular good varies inversely with its price (a downward-sloping DEMAND CURVE). A conspicuous consumption good may well have an UPWARD-SLOPING DEMAND CURVE so that the quantity demanded increases with its price.

constant returns 1 (in the SHORT RUN) constant returns to the VARIABLE FACTOR INPUT that occur when additional units of variable input added to a given quantity of FIXED FACTOR INPUT generate equal increments in output. With an unchanged price for variable factor inputs, constant returns will cause the short-run unit variable cost of output to stay the same over an output range. See RETURNS TO THE VARIABLE FACTOR INPUT.

2 (in the LONG RUN) constant returns that occur when successive increases in all factor inputs generate equal increments in output. In cost terms, this means the long-run unit cost of output remains constant so long as factor input prices stay the same. See MINIMUM EFFICIENT SCALE, ECONOMICS OF SCALE.

consumer the basic consuming/demanding unit of economic theory. In economic theory, a consuming unit can be either an individual purchaser of a good or service, a HOUSEHOLD (a group of individuals who make joint purchasing decisions) or a government. See BUYER.

consumer credit LOANS made available to buyers of products to assist them in financing purchases. Consumer credit facilities include HIRE PURCHASE, INSTALMENT CREDIT, BANK LOANS and CREDIT CARDS.

Consumer Credit Act 1974 a UK Act that provides for the licensing of persons and businesses engaged in the provision of consumer CREDIT (specifically, moneylenders, pawnbrokers and INSTALMENT CREDIT traders – but not banks, which are covered by separate legislation) and the regulation of DEBTOR-CREDITOR contracts. The Act contains important provisions protecting creditors from ‘extortionate’ rates of interest. The Act is administered by the OFFICE OF FAIR TRADING in conjunction with the DEPARTMENT OF TRADE AND INDUSTRY. See CONSUMER PROTECTION, APR.

consumer durables CONSUMER GOODS, such as houses, cars, televisions, that are ‘consumed’ over relatively long periods of time rather than immediately. See Fig. 158 (b) (PRODUCT LIFE CYCLE) for details of market penetration for a number of consumer durable products. Compare CONSUMER NONDURABLES.

consumer equilibrium the point at which the consumer maximizes his TOTAL UTILITY or satisfaction from the spending of a limited (fixed) income. The economic ‘problem’ of the consumer is that he has only a limited amount of income to spend and therefore cannot buy all the goods and services he would like to have. Faced with this constraint, demand theory assumes that the goal of the consumer is to select that combination of goods, in line with his preferences, that will maximize his total utility or satisfaction. Total utility is maximized when the MARGINAL UTILITY of a penny’s worth of good X is exactly equal to the marginal utility of a penny’s worth of all the other goods purchased; or, restated, when the prices of goods are different, the marginal utilities are proportional to their respective prices. For two goods, X and Y, total utility is maximized when:

Consumer equilibrium can also be depicted graphically using INDIFFERENCE CURVE analysis. See Fig. 30. See also REVEALED PREFERENCE THEORY, PRICE EFFECT, INCOME EFFECT, SUBSTITUTION EFFECT, ECONOMIC MAN, CONSUMER RATIONALITY, PARETO OPTIMALITY.

Fig. 30 Consumer equilibrium. The optimal combination of Good X and Good Y is at point E when the BUDGET LINE is tangential to indifference curve 1. At this point the slope of the budget line (the ratio of prices) is equal to the slope of the indifference curve (the ratio of marginal utilities), so the goods’ marginal utilities are proportional to their prices.

consumer goods any products, such as washing machines, beer, toys, that are purchased by consumers as opposed to businesses. Compare CAPITAL GOODS, PRODUCER GOODS.

consumerism an organized movement to protect the economic interests of CONSUMERS. The movement developed in response to the growing market power of large companies and the increasing technical complexity of products. It embraces bodies such as the Consumers’ Association in the UK, which is concerned with product testing and informing consumers through publications such as Which? Consumerism has been officially incorporated into British COMPETITION POLICY since the 1973 FAIR TRADING ACT. See CONSUMER PROTECTION.

consumer nondurables CONSUMER GOODS that yield up all their satisfaction or UTILITY at the time of consumption They include such items as beer, steak or cigarettes. Compare CONSUMER DURABLES.