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    Concentration of the auto industry

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    Industry structure is often measured by computing the Four-Firm Concentration Ratio. Suppose you have an industry with 20 firms and the CR is 20%. How would you describe this industry? Suppose the demand for the product rises and pushes up the price for the good. 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 20%. How would you describe this industry? What are some reasons why this industry has a high CR while the other industry had a low CR? Is it possible for smaller firms to thrive and profit in such an industry? How?

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    The four-firm concentration ratio represents the market share, as a percentage, of the four largest firms in the industry. A FFCR of 20% indicates that four firms control 20% of the market, and is a rather low percentage. Any percentage less than 40 represents monopolistic competition. In a market with an FFCR of only 20% is therefore approaching perfect competition. While there is still some control over price, most firms in this industry must charge the "going rate" or risk losing the customers that they have.

    In monopolistic competition, many different competitors offer slightly different products. They compete aggressively through advertising the characteristics of their ...

    Solution Summary

    Use of concentration ratios to describe the automobile industry