Four-Firm Concentration Ratio – Assignment Example

The paper "Four-Firm Concentration Ratio" is an excellent example of an assignment on macro and microeconomics.
Four firm-concentration ratio is a measure to know the aggregate strength, in terms of percentage of market captured, that four largest firms in an industry enjoy. Thus, the measure also acts as a way by which the particular industry structure can be comprehended. For instance, if there are 20 firms in an industry and the Four-Firm Concentration ratio is 30%, then, the industry structure is said to be characterized by Monopolistic Competition. On the other hand, if for the same number of firms in the industry, the Four-Firm Concentration Ratio is 80%, then the industry has an oligopolistic structure.
The reasons for the difference in the Concentration ratios of the two market structures are mainly -
1. Barriers to Entry
A monopolistic competition market structure is characterized by a large number of sellers, engaged in selling differentiated products. However, these differences are often found to be perceived in nature. Moreover, the cost of entry in such an industry is also very low, thus making the entry of smaller firms easier and curbing the power of the individual firms of influencing the public. But, in the oligopolistic market structure, the cost of entry is very high and thus, there is a first-mover advantage, thus enabling such players to have some controlling power over the market. Smaller firms have a very poor chance of entry in such markets.
2. Contestable Market Versus Price Leadership Strategy
Monopolistic market structure is characterized by a large number of players and thus, each of them has very little influence over the price structure of their products. However, in an oligopoly market, since the number of large players is few, there are a fewer number of rivals enabling each of them to have some control over their price structures.