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Industry structure and CR Ratio

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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 describes the four firm concentration ratio. It also discusses the effect of increased demand in the given market sceanrio. It lists the reasons why some industries have high CR or low CR. Answer is written in about 525 words.

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Solution:

Four firm concentration ratio is defined as the percentage of total market sales accounted for by four leading firms. (Sometimes this particular statistic is called the CR4.)

Four firm Concentration ratios only provide an indication of the oligopolistic nature of an industry and suggest the degree of competition. It reflects the extent of market control held by the four largest firms in the industry. However, it does not provide a lot of detail about competitiveness of the industry.

A CR ratio of 30% shows low concentration. In this industry 30% of the total output is produced by four major firms in the industry while rest of the 70% is produced by remaining 16 firms in the industry. A CR ratio of 30% suggests that market is monopolistically competitive. This type of market is ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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