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The Four-Firm Concentration Ratio
Pages 3 (753 words)
A market where there are 20 firms and a four-firm concentration ration (CR) of 30% would be highly competitive. It would reach a state of monopolistic competition1, short of perfect competition and too little concentration to be an oligopoly (AmosWeb Encyclonomic 2007)…
Eventually, the excess demand would be met and the price would again gain equilibrium.
The long run plans in this situation would be undertaken to maintain minimum long-range average cost. Increasing production in the short run may increase marginal cost. Long range plans would again bring these under control. The relatively low concentration level dictates that firms make plans and take actions based on the market, as no one of them can become a price maker. The market will set the price.
In the case where there are 20 firms with a four-firm CR of 80%, the firms would act differently. With fewer firms controlling a greater market share, they may be slower to react to the increase in demand. They may maximize profits by operating inefficiently. This may involve collusion either through agreements (price fixing) or a de facto situation where no producer wants to upset the pricing (Gilligan 2002). Prices would stay high until one of the firms, or an entrant, took action to fill the increased demand.
Concentration in an industry or sector can be, according to Gilligan (2002), "... a reward for being successful". Firms that produce the best products at the lowest cost will naturally come to dominate a market. Barriers to entry can also result in a high concentration ratio when new entrants are barred. ...
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