Concentration Ratio and Industry Structure - Essay Example

80% CR means the four largest firms produce 80% of the total output while the small firms produce only 20%of the output. Hence, the first and second cases can be described as monopolistic competition and oligopoly respectively (Auerbach, 1998). 2. A high CR for the industry shows that a high concentration of the industry is held by the four largest firms.

In other words, the industry is concentrated. At the same time, low CR shows that there are many rivals in the industry while none of them have a significant market share. This means that there is high competition in the industry. The reasons for the differences in concentration ratio are identified as economies of scale, entry barriers, compliance with an acceptable code of conduct, mergers, government policy, technological change, vertical integration, and market growth (Hay and Morris, 1991).

Based on these factors, the market for one industry has low CR and the other has high CR. In the high CR industries, the entry barriers will be high, there will be established brands and high product differentiation as well as high profits. In the low CR industries, the entry barriers will be low and under favorable price conditions, newcomers will be encouraged here.3. In the case of an industry with 30% CR, when the demand for the product rises and pushes up the price of the good, new firms will enter the market in the long run.

This is because the industry is monopolistically competitive. The production will increase and there will be cost stabilization at the initial levels. Consequently, there will be a convergence of the profit rate of firms to the same competitive return on capital with differences in risk aside in the long run. Thus, in the long run, there is a tendency to move towards perfect competition in this case with CR being very low (Oster, 1994).4. In the case of an industry with 80% CR, when the demand for product increases and pushes up the price, there will be an increase in price in the long run.

This is because no competitors enter the market due to high concentration. In the long run, due to the increase in price, there will be a tendency to move towards a perfect monopoly with very high CR in this case(Oster, 1994).. 5. It is very difficult but not impossible for small firms to thrive for profits in a high CR industry. For the small firms to survive, they have to take an oligopolistic stand of competition. In this case, there needs to be a mutual agreement between firms for a mutually independent move.

Then all firms will be conscious of the effect on the rivals. Under such conditions, there will be a joint response to all competitive moves due to the lack of breach of antitrust laws. The result will be a more civilized industry with gentle rivalry. Consequently, the competition between the rivals will be very low (Oster, 1994). This is very difficult to attain in a high CR industry since the competition and rivalry are not always predictable in the market there. Further, there will be high entry barriers, established products, and high product differentiation in high CR industries, which makes it very difficult for the small firms to thrive for profits there.