The Concentration Ratio and Js Transportation - Essay Example

There are no entry barriers or exit costs and therefore firms may choose to enter the industry to earn a profit or may exit to end losses.
In the monopolistic form of competition, a firm survives and thrives based on product differentiation. Thus non-price competition prevails in the market and it is up to a particular firm to convince consumers that its product is superior. Only then can it charge a higher price vis-à-vis rivals. Given the large number of sellers, collusion is practically impossible

In the event of an increase in demand, leading to an increase in price, the firms in the industry may earn higher profits in the short run. However, over time, the existing firms in the market will increase their production capacity or new firms will enter the industry to take advantage of the higher price. Either way, the supply-demand mismatch would vanish and the firms will earn normal profit only.
The assumption of symmetry in monopolistic competition, which states that when a new firm enters the industry it draws customers equally from all firms, will lead to a negligible change in the CR of the industry.

The aforesaid discussion suggests that if J’s Assistant Living is to start operations, the company will have to offer a differentiated product. The company will not be able to compete on the price plank and will earn normal profits in the long run. In case J’s Assistant Living does not succeed, it will be able to exit the industry easily.
The Concentration Ratio (CR) of 80 percent in industry B with 20 firms signifies that there is ‘high concentration’ in the industry. The industry is an oligopoly as the few largest firms account for 80 percent of the market share.

In an oligopoly, the market is dominated by a relatively small number of large firms. These firms have considerable market power and may either sell standardized products or differentiated products. Each firm realizes that any move that it makes would be taken note of by competitors. As such, the decisions that a firm takes are strategic as it invariably elicits a response from rivals. The main characteristics of this industry type include barriers to entry and exit by way of huge initial investment, information costs, and economies of scale. Government intervention and control are high to protect the interests of the consumers.

In the real world, firms operating in an oligopoly connive with each other, either openly or implicitly. The formation of such a group enables them to take decisions that maximize their joint profits.
Oligopolies are normally found in capital-intensive industries like automobile manufacturing, and aircraft manufacturing. Entry into these kinds of businesses requires a lot of money, which only a few players can afford. Patents and limited access to natural resources may also render the entry of many players infeasible. It is for these reasons that the CR in this industry tends to be higher vis-à-vis the CR in monopolistic competition.

Small firms do co-exist with the big players in an oligopoly but their chances of earning high profits are low. The reasons are not too far to seek to grab a larger chunk of the market share, these small firms could lower the price of their product. This strategy may not always be feasible since the firms have to cover their high costs. Furthermore,e the big firms enjoy higher economies of scale and have the potency to match the low price. Alternatively, small firms could differentiate their products and create a niche for themselves. Invariably, when such a strategy works, the big fish in the industry acquire the successful small firm and becomes more dominant. Read More