The structure of any given industry is usually measured by determining the value of its four-firm concentration ratio (CR), which indicates the size of the firm relative to the industry at large. In other words, a concentration ratio is made up of the market share in relation to the four biggest firms in the industry (Arnold, 2008, p. 251). A market that has roughly equal competitors has low concentration ratio while one with dominant competitors has a higher concentration ratio.
In that line of thought, for industry A with 20 firms, a 30% Concentration Ratio is relatively low. In an absolutely aggressive market, these firms would have equal share of the market and the 30% CR indicates that the market does not diverge much from a perfect competitive industry. Thus industry A is called a low concentration and it is said to operate under monopolistic competition (Carbaugh, 2010, p. 129).Some of the characteristics of a low concentration industry like A include; firms have equal benefits upon hike of the market price, no firms dominate the market therefore firms can sell the same quantity of product. Also, there are no firms to dictate the price since they all operate at the same level. As a result, commodity prices are determined by demand and supply thus maintaining the price at equilibrium.
Another characteristic is that there are no limits on the admission of new firms into this industry (Tucker, 2008, p. 172-173). An increased demand for the product that pushed up the prices of goods would imply that every person would acquire it but at some point its supply would decrease thus making the prices of these other goods even higher. As a result, very few of these firms will dominate the market by selling these high priced goods. Consequently, this anticipation will imply only a few firms will be controlling the market thus making the concentration ratio relatively higher (Carbaugh, 2010, p. 129).
Industry B, with 20 firms and a concentration ratio of 80%, the concentration ratio is higher and the industry is referred to as high concentration. In such an industry, only a few of the firms dominate the market and determine the price. Market competition is imperfect and the industry is said to operate under oligopolistic competition (Carbaugh, 2010, p. 129). This industry is characterized by the fact that entry to the industry by new firm is greatly restricted. This is because, when additional firms are firms are allowed, they will pose a competition to the few prevailing player. Due to the restricted entry, the few established dominant firms continue to reinforce their top position with time (Dicken &Lloyd, 1990, p. 257).
This industry has a higher concentration ratio because just a small part of the market, 20 firms, accounts for 80% of the market production. Conversely, industry A has a low concentration ratio because all the firms under it are responsible for a small percentage of the market production. Since this industry is controlled by the few dominant firms, it becomes impossible for small firms to operate under such competition (Dicken &Lloyd, 1990, p. 257). As a result, they fail and make it difficult to profit industry B. However; small firms can survive oligopoly completion only when they try to offer their services to niche markets.
In conclusion, industry A is a low concentration industry and operates under a monopolistic competition while industry B is a high concentration and operates under oligopolistic competition. Key characteristics of low concentration industry is that there are no restrictions for the entry of new firms and no firms dominate the market whereas high concentration industry, like B, is characterized by the fact that new firms are restricted into the industry so as to avoid competition with the dominant firms.
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