CR4 is computed by getting the total sales of the four largest firms in the industry, divided by the sum of its respective market shares. CR8, on the other hand, measures that of the eight largest firms. The values resulting from the said formula shall describe the degree of market control held by the largest 4 and 8 firms, respectively.
Suppose you have an industry with 20 firms and the CR is 20. How would you describe this industry
An industry of 20 firms with a CR20 implies there is low market concentration. The industry has very competitive market and exhibits monopolistic competition, where market players, or each of the company belonging to an industry, offer products that are highly differentiated, if not, substitutes of each others products. Each of the firms may have a change to establish its own domination in the industry. Examples of industries that exhibit this kind of structure are jewelry stores, restaurants and clothing stores.
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
In a monopolistic competition or more commonly known as imperfect competition, there is low barrier for entry of competitors. Other firms can enter the market and establish their own mini-monopoly. With the fact that the company has some control over the price of its goods, as demand for the product increases, the company can freely push up the price of its goods and enjoy profit. Such economic profit shall attract new players, who will partake in the same. In the long run, some firms will only just generate if not normal profit, break-even point, and others will leave the competition.
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
An industry of 20 firms with a CR80 implies there is high market concentration. This implies that the top four firms have a high control over the market and that there is oligopoly in the industry. In this type of market structure, the industry is being dominated by a few large firms who can dictate the price of competition. Other market players will have a hard time passing through the entry barriers, as the existing companies may have already established their brand names or reputations and customer base. Examples of industries which exhibit this kind of structure include cigarettes and automobile
Is it possible for smaller firms to thrive and profit in such an industry How
In an oligopoly, smaller firms may still thrive and profit through collusion. In collusion, the firms cooperate and agree to fix prices, divide markets and set output levels.