Concentration Ratio

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Runninghead: IP 1

Individual Project Unit 3

Concentration Ratio
Economists use concentration ratio to measure the degree of concentration in a market, computed as the percentage of the market output produced by the largest firms (O’Sullivan, Sheffrin, & Perez. 2008). One of predominantly concentration ratio used is the Four Firm Concentration Ratio. Four Firm Concentration Ratio isthe percentage of total output in a market produced by the four largest firms.

In considering a market with 20 firms and a CR of 20% , I came up with two market structures that this particular firm described. The two market structures were : (1) Perfect Competition. A perfect competition market has a very low concentration ratio, and it is a market structure with many firms, with each firm selling an identical product to many buyers. In this market structure there are no barriers to entry. And (2) Monopolistic Competition. A monopolistic competitive market has a concentration ratio that is under 40%, and it is a market with many firms, with each firm producing similar but slightly different products. There are also no barriers to industry in this market.

After reading and going back and forth about which market type best described this industry, I came to the conclusion that a Monopolistic Competitive market best described this market, even though it is a hybrid market structure, that has features of both a monopoly and perfect competition. A monopolistic competitive firm presents itself like a monopolist firm in the fact that it is possible for the firm to influence the market price of its product by moderating the rate of its production of the product. In the short run, the firm can utilize the heterogeneity of the market to reap positive economic profit. In the long run, however, whatever characteristic that enables one firm to reap monopoly profits will be duplicated by competing firms (Wikipedia, Monopolistic Competition). The...
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