Concentration Ratio

Concentration Ratio

Industry structure is often measured by computing the Four-Firm Concentration Ratio. The concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry.

There are four major types of market structures: Perfect competition, with a very low concentration ratio, is a market structure with many firms, each selling an identical product to many buyers. There are no restrictions on entry of new firms to the industry. With thousands of firms having a market share there is little power amongst any few firms. Monopolistic competition, below 40% for the four-firm measurement, is a market structure with many firms; each firm produces similar but slightly different products. Each firm possesses an element of market power with no restrictions on entry of new firms to the industry markets in which numerous firms supply products which are each slightly different. Oligopoly, above 40% for the four-firm measurement, is a market structure in which a small number of firms compete. The firms might produce almost identical products. The barriers limiting entry into the market the market power lies within 4 top producing firms. Monopoly, with a near-100% four-firm measurement because there is only one market holding the majority of the market power, is a market structure in which one firm produces the entire output of the industry There are no close substitutes for the product. There are barriers to entry that protect the firm from competition by entering firms.

An industry with 20 firms and the CR of 30%, from a market structure standpoint, if the four firm concentration ratios is less than 40% it is monopolistic competition. Monopolistic competition refers to a market structure that is a cross between the two extremes of perfect competition and monopoly. The model best describes markets in which numerous firms supply products which are each slightly different from that supplied by its competitors. Examples include automobiles, toothpaste, furnaces, restaurant meals, motion pictures, romance novels, wine, beer, cheese, shaving cream and many more. All of these products compete for consumers, but each is unique from the other and has its own price.

If the demand for the product rises and pushes up the price for the good, the long run adjustments would be partial to that of an oligopoly where each firm acts independently to adjust their prices toward equilibrium at the ideal, but cooperation such as price leadership tends toward higher profitability for all. Price leadership is a situation in which a market leader sets the price of a product or service, and competitors feel compelled to match that price. The occurrence of upward price