Concentration Analysis to Measure Competition in Megaprojects

The 2008 financial turmoil hit hard on many economies. Many countries and regions have since instigated major infrastructure developments to boost their economies. In this connection, the Government of Hong Kong began the Ten Mega Projects program. However, significant differences between tender prices and budget estimates have been reported, with the increases far exceeding the inflation factor. In view of the relatively large contract value and the available contracting capacity, lack of competition might have been one of the causes leading to the increase in tender price. This study investigates this phenomenon. To evaluate market concentration, four-firm concentration ratios (CR₄) and the Herfindahl-Hershamann Index (HHI) are used. Employing data from the Ten Mega Projects market and drawing insights from competition laws on concentration thresholds, it is found that the CR₄ results indicate a moderately concentrated market and HHI results suggest that the market is unconcentrated. The final results show an apparent firm size inequality. As such, the megaproject market displays a two-tier structure with a few large firms operating as oligopolies while numerous fringe firms act as price takers in perfect competition. A number of two-level entry barriers are also identified to account for this market structure, including product differentiation, capital requirements, switching costs for buyers between suppliers, government policies, and the size of incumbent firms. Compared with HHI, CR₄ is considered a more informing approach. It is also suggested that a similar concentration evaluation can be performed for other construction markets.