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The Four-Firm Concentration Ratio - Essay Example

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The Four-Firm Concentration Ratio

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. ...
A firm that has a dominant position in a market may be a price leader. Since they control the only supply, they can set the price. This will usually result in operating inefficiently. They will produce fewer units at a higher cost and much greater price. This will maximize their profits.
In a contestable market, the dominant firm will have to remain competitive even though they may have no competitors. If there are no barriers to entry, and the cost of entry is low, the dominant firm must sell at an equilibrium price to keep new entrants from competing. If they raise the price, new firms will enter the market and sell at a lower price. This will force the price back down and the new entrant will then exit the market if there are no barriers to exit.



The Purpose of Anti-Trust Legislation
Steve Ballmer, CEO of Microsoft, contends that, "We do not have a monopoly. We have market share" (cited in BrainyQuote 2007). In fact, the case against Microsoft was never about being a monopoly. It was about how they became and maintained a monopoly status. The original intent of anti-trust legislation, and indeed its only purpose, "is to promote economic efficiency" (Scott et al. 1998). Promoting economic efficiency dictates that the market must be a place of free competition. Collusion, coercion, and manipulation that places a competitor at a disadvantage reduces market efficiency. From the years 1990 - present, Microsoft has engaged in numerous activities whose sole purpose was to limit competition and place obstacles in the path of competitors (U.S. v. Microsoft 2002).
Monopolies are not always illegal and big is not always bad. It is the collusion with vendors and suppliers in an effort to make it ...Show more

Summary

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)…
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The Four-Firm Concentration Ratio essay example
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