Posted by economyst on Wednesday, November 26, 2008 at 8:46am in response to Economics.
Do a little research, then take a shot. What do you think?
My thinking is 40% CR, and smaller frims would thrive, due to less overhead.
What is you take ?
What is the computing? in terms of math
Industry structure is often measured by computing the Four-Firm Concentration Ratio. Suppose you have an industry with 20 firms and the CR is 20%. How would you describe this industry? Suppose the demand for the product rises and pushes up the price for the good. What long-run adjustments would you expect following this change in demand? What does your adjustment process imply about the CR for the industry? Now consider that the industry has 20 firms but the CR for the industry is 80% instead of 20%. How would you describe this industry? What are some reasons why this industry has a high CR while the other industry had a low CR? Is it possible for smaller firms to thrive and profit in such an industry? How?
To answer this question, we first need to understand what the Four-Firm Concentration Ratio (CR) is and how to compute it. The CR is a measure of industry concentration and is calculated by adding the market shares (measured by sales or production) of the four largest firms in the industry.
In this case, the industry has 20 firms and a CR of 20%. This means that the four largest firms in the industry account for 20% of the market share.
A CR of 20% suggests a relatively low concentration in the industry, with a large number of firms competing against each other. This indicates a more competitive market structure, where no single firm has a significant market power.
If the demand for the product rises and pushes up the price, it would likely lead to increased profits for the firms in the industry. In the long run, this change in demand would attract new firms to enter the industry, leading to an increase in the number of firms. This entry of new firms would result in more competition and would likely lead to a decrease in the CR for the industry. Therefore, the adjustment process implies that the CR for the industry would decrease as more firms enter and compete.
Now, let's consider a different scenario where the industry has 20 firms, but the CR is 80% instead of 20%. This means that the four largest firms in the industry account for 80% of the market share.
A CR of 80% suggests a high concentration in the industry, with a small number of firms dominating the market. This indicates a less competitive market structure, where a few firms have significant market power.
There could be several reasons why this industry has a high CR. It could be due to barriers to entry, such as high initial investment costs, brand loyalty, patents, or government regulations, which make it difficult for smaller firms to enter and compete. It could also be due to economies of scale, where larger firms are able to achieve lower average costs compared to smaller firms, giving them a competitive advantage.
In such an industry with a high CR, smaller firms may find it challenging to thrive and profit. However, it is not impossible. Smaller firms can try to differentiate their products or services, focus on niche markets, or use innovative strategies to carve out a market share for themselves. They can also form alliances or collaborate with other firms to increase their bargaining power and compete effectively. Additionally, changes in market conditions or technological advancements may create opportunities for smaller firms to enter and succeed in the market.
The Four-Firm Concentration Ratio (CR) is a measure used to assess industry structure. It is calculated by adding up the market shares of the four largest firms in the industry. In this case, we have an industry with 20 firms and a CR of 20%.
With a low CR of 20%, this industry can be considered relatively competitive. There is a larger number of firms operating in the market, indicating a lower level of concentration. Smaller firms are likely to have a better chance of thriving in this industry due to less competition from dominant players. Additionally, lower overhead costs can also contribute to the success of smaller firms.
If the demand for the product rises and pushes up the price, long-run adjustments can be expected in the industry. As the price increases, it becomes more profitable for firms to enter the market. This will lead to the entry of new firms, increasing competition and potentially reducing the CR. Over time, the industry will adjust to the new demand, with more firms competing and potentially reducing market concentration.
Now let's consider the industry with 20 firms but an 80% CR. This high CR indicates a higher level of industry concentration. It means that the four largest firms in the industry hold a significant share of the market.
There could be several reasons for a high CR in this industry. One possible reason is barriers to entry, which may limit the ability of smaller firms to enter and compete. Barriers like high capital requirements, economies of scale, or strong incumbents can deter new entrants and contribute to higher concentration.
In an industry with a high CR, smaller firms may find it challenging to thrive and profit. The dominant firms typically have a competitive advantage, such as better economies of scale, established customer base, or stronger brand presence. However, smaller firms can still carve out a niche by focusing on niche markets, offering specialized products or services, or finding ways to differentiate themselves from the larger firms.
Overall, the industry structure, as indicated by the CR, plays a crucial role in determining the competitiveness and profitability of firms within the industry. Higher CRs indicate greater market concentration and potential challenges for smaller firms, while lower CRs suggest a more competitive landscape where smaller firms can thrive.