Concentration Ratios

Essay by dannyduranUniversity, Bachelor'sA-, March 2007

download word file, 2 pages 4.7

Concentration ratios are a measure of the degree of concentration in a market. The four firm concentration ratios is the percentage of the market output produced by the four largest firms. (O’Sullivan & Sheffrin, 2006) Wikipedia describes it as: an indicator of an industry of the relative size of firms in relation to the industry as a whole. (, 2006)Suppose we have an industry with 20 firms and the CR is 30% this would be described as an unconcentrated market. (O’Sullivan & Sheffrin, 2006) Since the market is less than 30% not any one firm controls the market. If the product demand rises and pushes up the price all firms having this upward trend will in the market will benefit, and prices will continue to move slowly upward to the ceiling price of the product. The long term effects of this type of situation is that the price will go higher until customers will no longer pay for the product at the ceiling price and will not purchase said product until the price stabilizes.

The adjustment process for the industry implies that consumers purchase products that they want to and at the price that they think is affordable.

Now suppose the 20 firm industries is at an 80 % Concentration Ratio it would be described as an oligopoly. An Oligopoly is a market served by a few firms. . (O’Sullivan & Sheffrin, 2006) There are many reasons why CR numbers are different from one industry to another. One reason could be that there are more barriers in one market than in other markets thus only bigger firms can afford to be in the top sections keeping the numbers small. Another reason is efficient production. For they may control raw materials needed to produce their products thus it make it more...