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4Firm Concentration Ratio - Essay Example

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A four-firm concentration is that ratio which indicates the share of total market sales accounted for by the four largest firms. An industry with 20 firms and CR of 30% is considered to be in monopolistic competition. A four-firm CR of 30% means that 30% of the total market sales in the industry are controlled by the four largest firms…
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4Firm Concentration Ratio
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TEMPLATE FOR Paper IP ______________________ Assignment Your answer Points How would you describe an industry with 20 firms and the CR is 30%Type your answer and explanation here. (must clearly explain answer to earn points; points will be given for clarity)
A four-firm concentration is that ratio which indicates the share of total market sales accounted for by the four largest firms. An industry with 20 firms and CR of 30% is considered to be in monopolistic competition. A four-firm CR of 30% means that 30% of the total market sales in the industry are controlled by the four largest firms. In monopolistic competition, there are many producers and consumers, products are differentiated, no barrier to entry or exit and each firm is not a price taker.
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2. What long run adjustments would you expect if demand for the firms product rises and pushes up the price Explain clearly
Type your answer and explanation here. (must clearly explain answer to earn points)
If the demand for the products rises and pushes up the prices for the good, the firms in the industry will be enjoying an economic profit. The reason is that the demand curve is higher than the average total cost curve. However, in the long run following this change in the demand, many firms will be attracted to the industry to capture the economic profit since there is free entry and exit and this causes the economic profit to disappear.
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3. What does your adjustment process imply about the CR for the industry Explain
The adjust process implies that the industry will continue to maintain the 30% CR because those who look for the economic profit have gone. Monopolistic competition operates only at a normal profit in the long run; therefore the industry will maintain monopolistic competition.
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4. How would you describe the industry if it has 20 firms but the CR is 80% instead of 30%
Suppose the industry has 20 firms but the CR for the industry is 80% instead of 30%, this means that the largest four firms are controlling 80% of the total market sales. This type of industry is called oligopoly. In oligopoly, each of the oligopolies faces a downward sloping demand curve, decisions of one firm influence the decision of another and as such they watch each other keenly. Oligopolies do not change prices occasioned by minor adjustments in prices of raw materials, they only change when there are major changes in the general cost of production. In the long run prices do change.
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5. What might some reasons be for a high CR in this industry while the one above has a low CR
Reason why this industry has high CR ratio while the other industry had a low CR ratio are:
a) Competition: when there is a competition in the industry and with government intervention there is bound to be low CR ratio while lack of competition brings about high CR ratio like in a monopoly.
b) Entry into the Industry: If a particular industry has high or unrestricted entry level, there is that tendency for the CR to be low and vice versa.
c) Products: products play important role in determining CR of an industry. With homogenous products in a perfect competition there will likely be a low CR while heterogeneous products of a monopoly bring about high CR.
d) Pricing: Industry in which a firm cannot decide on the price would have low CR because if the firm does it will fix it at a high or low price. But if a firm is a price maker, it can operate at a reasonable profit and as such will have a high CR.
e) Number of firms: In addition, number of firms indicates if an industry has a high CR or low CR. A large number of firm in an industry leads to a low CR while a few or a single firm result in a high CR.
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6. Can smaller firms thrive and profit in such an industry If so, how
It is very much possible for smaller firms to operate at profit in such an industry. The reasons are: those small firms engage in exchange instead of production. Another is that they offer personalized services in which if any of their customers is maltreated as a result of transacting business with them, this can easily be resolved. They can attract good size of the market by spending some amount of money on advertisement. Lipsey R. etc said "The local grocery, supermarket, discount house and department store not only consider weekend special and provide sales important to business, but they also spend a good deal of money advertising them". More so, small firms can respond swiftly to any changes in the business environment; this can take bigger firms some time to adjust.
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7. If the dominant firm uses a price leadership model, what is the effect on market efficiency, compared to a contestable markets model
The effects on the market efficiency if the dominating firms use a price leadership model versus a contestable markets model are: In price leadership since the firm in question or market leader sets the price of the products there is that tendency for the products to have low quality. Unless compelled by government agency or competed by other firms the quality of the products can be compromised. Nowadays many price leaders have invested in research and development thereby making their products standardized.
The effects of market efficiency in a contestable markets model are enormous. The model says if an industry consists of one seller he will behave as if there are many sellers so that he can increase his profit. In perfect competition in which complete freedom of movement is perfectly contestable goods and services will have high quality and be economically efficient due to the inherent competition in the system. A firm that can not meet up with the standard are bound to leave while the one that can withstand (in the long run) such would enjoy normal profits.
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8. Define, in your own words, relevant economic terms for this topic. Show relevant formulas.
Post your definitions here. Definitions should be clear, and in your own words and not copied and pasted or quoted from elsewhere.
Economic terms used:
Economic profit: This is profit in excess of normal profit, calculated as the difference between demand and average total cost.
Oligopoly: A market structure with a few sellers.
Monopolistic Competition: A market structure in which firms sell differentiated products and there are barriers into the industry.
Production: This is the creation of goods and services.
CRn = S1 + S2 + S3 + S4
Where CRn is the concentration ratio of nth firms
Sn is the nth firm in the industry and is controlling the total share of the industry.
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9. Bibliography (Citation of all sources in APA format: every assignment must have at least one citation)
Show all citations here
Bibliography
1. Lipsey, R., Purvis, D., & Steiner, P. (1988). Economics, (6th Ed.) New York: Harper & Row Publishers. Pp 253-255.
2. McConnel, C., Brue, S., & Barbiero, T. (1996). MicroEconomics, (7th Ed.) Toronto: McGraw-hill Ryerson. Pp 264-265.
3. Industrial Concentration: Retrieved April 8, 2006 from http://www.quickmba.com/econ/micro/indcon.shtml
4. Concentration Ratio: Retrieved April 8, 2006 from http://en.wikipedia.org/wiki/Concentration_ratio

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