Concentration Ratio Industry
This paper provides an understanding of the concentration ratio and how it contributes towards the understanding of the industry. Concentration ratio helps in determining the degree of competition. Apart from this, the paper provides the description of an industry with 20 firms with a CR of 20% and another industry having 20 firms with a CR of 80%. Last but not the least, how smaller firms can thrive and gain profit in such a industry is also explained in the paper.
The concentration ratio of any industry acts as an indicator which describes the relative size of firms with respect to the industry as a whole. Apart from this, it also assists in finding the market form prevailing in the industry. Four-firm concentration ratio is the most commonly used concentration ratio which considers market share as a base for the percentage among the four major firms in the industry. Concentration ratios vary from the range of 0 percent which is at the lower end to 100 percent representing an enormously concentrated oligopoly (Industry concentration, 2007).
Description of the industry having CR 20%
An industry having 20 firms along with the CR of 20 percent shows low concentration. In this case, the monopolistic competition lies at the bottom and oligopoly appears closer to the higher end. Therefore, this industry falls under the category of the Monopolistic competition which is a general form of a market (Industry concentration, 2007). The key characteristics of this industry include:
- Presence of numerous producers and numerous consumers in the market
- Consumers generally perceive that there is an occurrence of non-price differences among the products of the competitors
- Minimum barriers exist for entry and exit
- Producers have greater level of control over the price
Similarity is observed in the characteristic of the monopolistically competitive market and perfect competition. The exception lies in the heterogeneity of the products and also monopolistic competition engages a huge component of non price competition which is based on a slight differentiation in the product. A firm reaping earnings in the small term will show break even in the long term because of the decrease in the demand and increase in the average total cost. This infers that in the long term, a firm which is monopolistically competitive, would make economic profit of zero level.
This would provide the company with slight quantity of power over the market. Based on the loyalty of the brand it can lift up its prices with no loss in its customer base. As a result of the above mentioned factors, the demand curve of the individual firm shows downward slope. As in the long run, marginal cost is less than the price, hence, monopolistically competitive market is considered to be a slightly inefficient market structure (Case & Fair, 2008).
If the demand of the product increases and pushes the prices of goods, the long term adjustment in this case would be the increment in the Government expenditure and reduction in the taxes. Apart from this, expansion in the aggregate demand could be an effective long term adjustment.
Description of the industry having CR 80 %
An industry having 20 firms along with a concentration ratio of 80 percent shows a high concentration. Industries that fall in this category involve high concern by the Government regulators. An oligopoly is characterized by the market form where the market is subjugated by a fewer number of sellers. In this market there is presence of few participants and each oligopolist is conscious about the procedures of the others. Apart from this, the decision taken by a firm influences the other firms. At times, the firm’s decision also gets influenced by the competitive firms. In this industry the Strategic planning done by oligopolists constantly involves taking into consideration the probable reactions of the participants from other market. Hence, this makes the oligopolistic industries highly risky for collusion (Monopolistic Competition and Oligopoly, 2002).
In this competition, chances of obtaining broad range of outcome are there. In few circumstances, the firms may plan for increasing the prices and limit production in the similar manner as in a monopoly market. Whenever there is a chance for formal argument for collusion, the system so formed is termed as the cartel. In this oligopoly market condition the firms show there operation under imperfect competition. The inelasticity under market price and elasticity beyond market price is reflected by the kinked demand curve. In order to accumulate greater revenue and market share firms go for the adoption of non price competition. Kinked demand curves shows similarity with the traditional demand curves as both are downward sloping. Because of this kinked demand curve, firm cannot raise their prices as slight rise in their price can lead to the loosing of numerous customers (Monopolistic Competition and Oligopoly, 2002).
In order to suppress the competition, Oligopoly industry creates extreme levels of differentiation. The factors that results in the creation of oligopoly market include extraordinary levels of competition which has been fueled by increase in the globalization. The product development and advertising plays a vital role in determining market d\share for the oligopoly industry (Monopolistic Competition and Oligopoly, 2002)
Oligopoly industry has higher CR
The oligopoly industry shows high concentration ratio because here the firms are highly competitive and have almost equal sales as compared to the monopolistic industry. Smaller firms can thrive and earn profit in this industry, firstly, by keeping a check over the activities of the other firm. Secondly, by forming the collusion they can averse the risk. Formation of the Cartel is an example of the collusion (Case & Fair, 2008).
Case, K. E. & Fair, R. C. (2008). Principles of Macroeconomics (7th Edition). Publisher: Prentice Hall
Industry concentration (2007).Retrieved September 9, 2008 from http://www.quickmba.com/econ/micro/indcon.shtml
Monopolistic Competition and Oligopoly. (2002). Retrieved September 9, 2008 from http://www.unf.edu/~traynham/ch14%20edited%20lecture.pdf