Economic Factors
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Industrial concentration simply refers to structural characteristic of a business sector and explains how a few large firms are dominating the industry or the economy as a whole or now in the present time is used as an indicator of superior economic performance (Shughard,2008). Concentration Ratio (CR) and Herfindahl-Hirchman Index (HHI) are two of the commonly used methods to determine or measure the industry concentration. When using these methods, market share of the few large firms are simply added.
When an industry is either monopolistic or oligopolistic it usually means that the concentration ratio is larger and the industry is more concentrated, and the industry is not as competitive and few large firms demand a large market share. When the concentration ratio of an industry is low then that industry is more competitive. In this sort of industry there are many firms and larger firms do not demand a very large percentage of market share.
There are 20 firms in Industry A with a concentration ratio of 30%, meaning that large firms demand 30% of the market share. The average four firm concentration ratio is 36%. Some characteristics of this industry are;
1.) This is a competitive industry, and firms operate on a low profit margin
2.) No other firm can change the price since it is based on supply and demand
3.) Economic profits attract new firms into the competitive market and competition will arise and equilibrium will arrive where price equals marginal revenue. (Profit maximizes and marginal revenue will equal marginal cost.
In industry A, when demand increases the price will go up which will increase the profit margin. As entry barrier is low, high profit margin will attract new firms and in long run, because of entry of new firm, supply will also increase, which will bring down the price. Then equilibrium will establish where price equals marginal revenue.(As stated in #3 of characteristics) Profit will be maximize and marginal revenue will equal marginal cost.
Industry B has a higher concentration ratio which sets at 80% so larger firms control 80% of the market shares and is also considered an oligopoly (an industry with a concentration ratio above 40%). With this industry having a higher concentration ratio it will not be a competitive industry. This industry has high entry barrier which does not allow new firms to enter into their market. Some characteristics of this industry are:
1.) They are not competitive and with the high entry barrier they are not allowing new firms to enter the market.
2.) With an 80% concentration ratio means large firms control that much of the market and able to increase price higher than the marginal cost.
3.) Information isnt available to the buyer or seller readily.
The entry