Detailed Explanation of Monopolistic Competition
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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 30%. How would you describe this industry? Suppost the demand fo the product rises and pushed 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? Consider the industry has 20 firms but the CRfor 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 had 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 contestants markets model. Show your work.
How do I calculate that the industry has 20 firms but the Cr for the industry is 80% instead of 30%. How would I describe the industry? What are the reasons why the industr has a high Cr while the other industry has a lowCr? Is it possible for smaller firms to thrive and profit in an industry? And how? What would be the effects on market efficiencies if the dominating firms use a price leadershipmode versus a contestable market model?
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Solution Summary
The four-firm concentration ratio is assessed.
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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 ...
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