A question from Yahoo! Answers:
Economic question : Why do some markets consolidate while others fragment over time ?
Many markets – esp. media-related markets such as magazines, newspapers, websites, tv channels etc. have fragmented and are increasingly catering to niche audiences.
Other markets – banks, steel, enterprise software etc. have consolidated over time.
Can an economist or some financial expert point me to the fundamental forces in play that determine whether a market will fragment or consolidate over time ?
First of all, there are different ways to look at fragmentation. Media industry, for example, may be fragmented in terms of output it produces, but its ownership is getting increasingly concentrated over time. 85% of U.S. newspapers, for example, have circulation under 50,000, while 20 largest newspaper companies control 60% of newspaper circulation.
This said, there are two fundamental forces that determine whether an industry is going to remain fragmented or consolidate. One is consumer preference; some products are (perceived as) standardized, while others are (perceived as) differentiated (producers of standardized products compete primarily on price, while producers of differentiated products compete primarily on features). The other is the interplay of economies of scale and economies of scope.
In industries whose products are perceived as standardized, the outcome is largely determined by economies of scale. The industry consolidates as far as economies of scale allow.
If the product is perceived as differentiated, the outcome is determined by economies of scope; the industry consolidates as far as economies of scope allow.