Concentration Ratio and Industry A - Essay Example

Industry A has 20 firms and a (CR) of 20%. The Concentration Ratio is centered around how much of the market is controlled by the firms involved, in this case with 20 firms and a (CR) of 20% the controlled value is low. (Concentration Ratio, 2011 p 1) This implies that the industry is an either highly competitive industry. This means that every involved organization in this particular industry can enter and exit the market with low barriers. This industry type could be termed a “perfect competition” however, because it has a (CR) of 20% it is also close to an oligopoly. To be a “perfect competition” the characteristics would need to include, all firms selling the same products, all firms involved being price takers, all firms having a relatively small market share, buyers knowing what is being sold and for how much, and the ability to enter and exit the market. (Perfect Competition, 2011 p 1) In this environment, the ability to enter the market with low to no barriers will allow for more competition to be available. The long-term adjustments would need to be expecting lower prices and normal profits. The (CR) will remain low in this industry model due to greater competition.

Industry B
Industry B has 20 firms and a (CR) of 85% which places it in the oligopoly to monopoly range in business types. An oligopoly is characterized by a few dominant firms and many small ones, standardized and differentiated products depending on the industry, power of dominant firms over pricing, barriers to becoming a dominant firm, and the use of non-price competition due to fear of price wars. (Petroff, 2002 para. 2) A monopoly, however, is a situation where a single company or group owns the entire market or is close to it. Because this tends to mean it is a business that has a single firm it would not necessarily apply in this case. (Monopoly, 2011 p 1) To figure out the proper concentration ratio it is necessary to use the Herfindahl-Hirschman Index, “a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers.” (Herfindahl-Hirschman Index, ND)

Conclusion
Industry A would be appropriate for a small business given the ability to enter and exit with relative ease. This, however, should not discount the possibility of Industry B’s ability to control a market and pricing as well. The entry barriers may be insurmountable in this industry type though the rewards could be significantly greater. Given the available information, Industry A seems to be the best approach for a small business venture. Read More