You want to start a company, and are trying to decide between two different industries. You are doing your final research before you write your business plan.
Industry A has 20 firms and a Concentration Ratio (CR) of 20%
* What is the name for this type of industry?
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Describe some of this industry's characteristics.
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If you were in this industry and there was an increased demand for the product that pushed up the price of goods, what long-run adjustments would you expect?
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What does your anticipated adjustment process imply about the CR for the industry?
Industry B has 20 firms and a Concentration Ratio (CR) of 85%.
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What is the name for this type of industry?
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Describe some of this industry's characteristics.
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What are some reasons why this industry has a high CR while Industry A had a low CR?
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Is it possible for smaller firms to thrive and profit in Industry B? Why or why not?
Industry A, with 20 firms and a Concentration Ratio (CR) of 20%, is an example of a competitive industry.
Characteristics of a competitive industry include:
1. Large number of firms: There are many players in the industry, resulting in numerous competitors.
2. Low barriers to entry: It is relatively easy for new companies to enter the market, making it accessible for new players.
3. Price-taker behavior: Each firm has a small market share, and therefore, has no influence over market prices. They must accept the prevailing market price.
If there was an increased demand for the product in Industry A, pushing up the price of goods, the long-run adjustments would be as follows:
1. Entry of new firms: The industry's profitability attracts new firms, leading to an increase in the number of competitors.
2. Existing firms expanding: The current firms may expand their operations to capitalize on the increased demand.
3. Increased production: With more players in the market, the total production capacity of the industry will rise.
4. Price stabilization: The entry of new firms and increased production leads to a stabilization of prices as supply meets demand.
The implication for the Concentration Ratio (CR) of the industry is that it will likely decrease. Since new firms enter the market and the existing firms expand, the market share of each individual firm will decrease, resulting in a lower CR.
Industry B, with 20 firms and a CR of 85%, is an example of an oligopolistic industry.
Characteristics of an oligopolistic industry include:
1. Small number of large firms: There are only a few dominant players in the industry, and their actions can significantly influence market conditions.
2. High barriers to entry: It is difficult for new firms to enter the market due to factors like high capital requirements or strong brand loyalty enjoyed by existing firms.
3. Pricing power: Due to the limited number of competitors, firms in oligopolies have some control over market prices.
The high CR in Industry B compared to the low CR in Industry A can be attributed to several reasons, such as:
1. Barriers to entry: Industry B likely has higher barriers to entry, making it more difficult for new firms to establish themselves in the market.
2. Market consolidation: Over time, larger firms in Industry B might have acquired or pushed out smaller competitors, leading to a more concentrated market structure.
3. Economies of scale: Industry B might require a higher level of capital investment or benefit from economies of scale, favoring larger firms.
In Industry B, it may be challenging for smaller firms to thrive and profit due to the dominant position of the larger firms. The high CR indicates that a few firms hold a significant market share and likely have more control over market conditions. Smaller firms may struggle to compete on price, innovation, or marketing power, making it difficult for them to gain a foothold and achieve profitability.