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Concentration Ratio and nature of industry

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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 30%

- 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 80%.
-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 Summary

Solution explains the term concentration ratio. It explains the structure of given industry and discusses the long run effect of increase in demand on CR ratio. It lists possible reasons for low and high Four-Firm CR ratio. Answer is provided in about 800 words.

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Concentration ratio represents the percent share of output produced by largest given number of firms in relation with total industry output. Concentration ratio of m largest firms is shown as Cm. Generally, 4-firm concentration ratio or 8-firm concentration ratio is used for study purposes. Concentration ratio suggests the degree of competition. It reflects the extent of market control held by some largest firms in the industry. It does not give any idea about the distribution of shares of remaining firms in the industry. CR ratio alone cannot give much idea about competitiveness of the industry. For example, four firm concentration ratio is 85% for beer industry and is 71% for airline industry. We see that there is no much difference in ratios but there is a significant difference in market structure. Beer industry is dominated by Anheuser-Busch, while market share of leading airline is much smaller.

A CR ratio of 30% shows low concentration. It means that some largest firms say 4 firms accounts for 30% of industry output. Remaining 16 firms account for 70% share of the total output in the industry. A CR ratio of 30% suggests that market is monopolistically competitive.

This type of industry has large number of relatively ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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