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computing the Four-Firm Concentration Ratio

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Industry structure is often measured by computing the Four-Firm Concentration Ratio. Suspose you have an industry with 20 firms and the CR is 30%. HOw would you describe this industry? Suspose the demand for the product rises and pushes up the price for the goods. What long-run adjustments would you expect following this change in demand? What does your adjustment process imply about the CR for the industry?

Now consider that the industry has 20 firms but the CR for the industry is 80% instead of 30%. HOw would you describe this industry? What are some reasons why this industry has a high CR while the other industry has a low CR? Is it possible for smaller firms to thrive and profit in such an industry? HOw? Contrast the effects on market efficiency if the dominating firms use a price leadership model versus a contestable markets model.

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Monopolistic competition is contextualized.

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For an industry with 20 firms and the CR is 30%, it can be described as monopolistic competition. The form of economic competition known as Monopolistic competition occurs when:
1. There are many producers and many consumers in a given market.
2. Consumers have clearly defined preferences - the goods and services are heterogeneous
3. Freedom of entry.
Since there is freedom of entry, in the long run, more and more firms would come into the market to make profit and the prices would ...

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