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Determination of Industry Structure

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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? 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 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?

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Solution Summary

Determination of industry structure based on the number of firms and their market shares. Adjustment processes and profit potential in different market structures.

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The four-firm concentration ratio represents the market share, as a percentage, of the four largest firms in the industry.

In terms of market structure a four firm concentration ratio of less than 40% represents monopolistic competition. In such a market, many different competitors offer slightly different products. They compete aggressively through advertising the characteristics of ...

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