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? Contrast the effects on market efficiency if the dominating firms use a price leadership model versus a contestable markets model.
The Four-Firm Concentration Ratio is the portion of the industry's sales revenue that is earned by the largest four firms in the industry. The bigger the ratio the more concentrated and monopoly-like the industry is. If the concentration ratio in an industry is 30% we can call this a monopolistic competition. In this type of industry the competitive firm acts similar to the monopolists in the short run, but in the long run it has no profits and excess capacity. If the the demand for the product rises and ...
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