Four-Firm Concentration Ratio
Definition of the Four- Firm Concentration Ratio This is one of the most common concentration ratios. The four-firm concentration ratio is commonly used to indicate the degree to which an industry is oligopolistic and the extent of market control held by the four largest firms in the industry. How would you describe an industry with 20 firms and the CR is 20% and its implications? The four-firm concentration ratio is calculated based on the market shares of the largest firms in the industry. Having an industry falling between 0 to 50% is commonly interpreted as an industry with low concentration ratio; the main description of this concentration is that it is a very competitive market also known as monopolistic competition. Monopolistic competition is a market structure characterized by a large number of firms which are similar but do not sell identical products, relative freedom of entry, into and exit out of the industry, and extensive knowledge of prices and technology. Monopolistic competition approximates most of the characteristics of perfect competition, but falls short of reaching the ideal benchmark, that is perfect competition. What long-run adjustments would you expect following this change in demand? First of all, since a change in demand took place, it is important to clarify the relationship between the monopolistic competition and demand. The demand curve for the output produced by a monopolistically competitive firm is relatively elastic. The firm can sell a wide range of output within a relatively narrow range of prices. Demand is relatively elastic in monopolistic competition because each firm faces competition from a large number of very, very close substitutes. However, demand is not perfectly elastic (as in perfect competition) because the output of each firm is slightly...
References: FOUR-FIRM CONCENTRATION RATIO (2008). AmosWEB Encyclonomic WEB*pedia. Retrieved from
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=four-firm+concentration+ratio on November 29, 2008.
O’Sullivan, Sheffrin and Perez (2008). Economics: Principles, Applications, and Tools. Upper
Saddle River, NJ: Pearson Prentice Hall.
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