4Firm Concentration Ratio

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A four-firm concentration is that ratio which indicates the share of total market sales accounted for by the four largest firms. An industry with 20 firms and CR of 30% is considered to be in monopolistic competition. A four-firm CR of 30% means that 30% of the total market sales in the industry are controlled by the four largest firms.


The reason is that the demand curve is higher than the average total cost curve. However, in the long run following this change in the demand, many firms will be attracted to the industry to capture the economic profit since there is free entry and exit and this causes the economic profit to disappear.
The adjust process implies that the industry will continue to maintain the 30% CR because those who look for the economic profit have gone. Monopolistic competition operates only at a normal profit in the long run; therefore the industry will maintain monopolistic competition.
Suppose the industry has 20 firms but the CR for the industry is 80% instead of 30%, this means that the largest four firms are controlling 80% of the total market sales. This type of industry is called oligopoly. In oligopoly, each of the oligopolies faces a downward sloping demand curve, decisions of one firm influence the decision of another and as such they watch each other keenly. Oligopolies do not change prices occasioned by minor adjustments in prices of raw materials, they only change when there are major changes in the general cost of production. In the long run prices do change.
c) Products: products play important role in determining CR of an industry. ...
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