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Market Structures and Concentratio Ratio

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You want to start a company, and are trying to decide between two different industries. You are doing your final research before you write your business plan.

Industry A has 20 firms and a Concentration Ratio (CR) of 20%

-What is the name for this type of industry?
-Describe some of this industry's characteristics.
-If you were in this industry and there was an increased demand for the product that pushed up the price of goods, what long-run adjustments would you expect?
-What does your anticipated adjustment process imply about the CR for the industry?
Industry B has 20 firms and a Concentration Ratio (CR) of 85%.
-What is the name for this type of industry?
-Describe some of this industry's characteristics.
-What are some reasons why this industry has a high CR while Industry A had a low CR?
-Is it possible for smaller firms to thrive and profit in Industry B? Why or why not?

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Solution Preview

Hello Student,

Before you begin to answer these questions, the information given below which speaks to the various types market structures and which gives an overview of concentration ratios, should help you.

By this you should know that the markets or industries in which firms operate vary a great deal. You have firms which are highly competitive and so the profits in these markets or industries are hard to come by; and you also have firms that are free from competition and hence firms in these markets earn large profits. In addition, there are four market types or structures under which firms may be classified. They include - perfect competition, monopolistic competition, oligopoly and monopoly (each of these is explained or described below).

In a perfectly competitive market, there are usually many buyers and sellers who are all price takers; there are homogenous products i.e. all sellers supply the same identical product; and firms can freely enter and exit the market. You hardly find perfectly competitive market in real life however.

A monopolistic competitive market is a market structure characterized by a large number of small firms; there are similar but not identical products which are sold by the firms; there is relative freedom of entry into and exit out of the industry; and there is an extensive knowledge of prices and technology by all in the market.

An oligopoly is a form of market where there is domination of a limited number of suppliers and sellers called oligopolists. The key features of an oligopolistic market are highlighted below:

"An oligopolistic market comprises a handful of firms, engaged in selling analogous products. All oligopolistic markets increase mutual dependence among the firms involved in similar competition." This occurs because in an oligopolistic market it is highly likely that because there are few sellers, each oligopolist will be aware of the actions of the others and the decision that one firm makes may be influenced by the decisions of the other firm (hence, there is interdependence among firms). You may find at times ...

Solution Summary

This solution first gives an overview of the various types of market structures and their characteristics i.e. perfect competition, monopolistic competition, oligopoly and monopoly. It then explains the concept of concentration ratios and how you can tell whats the type of industry given the number of firms in the industry and its concentration ratio. The solution is adequately referenced.