Concentration ratios have often been used to note the tightness of an oligopoly

Question

Concentration ratios have often been used to note the tightness of an oligopoly market. A high concentration ratio indicates a tight oligopoly market, and a low concentration ratio indicates a loose oligopoly market.

Complete the sentences to describe how profits are related to the concentration ratio of a market

One would expect firms in tight markets to reap higher profits, on average, than firms in loose markets, because the “tighter” the oligopoly the (higher/lower) the likelihood of collusion. In turn, collusion will make the oligopoly more like a cartel and allow it to charge monopoly prices and reap monopoly profits. The presence of potential entrants will always (encourage/limit) monopolistic behavior.

Explanation / Answer

One would expect firms in tight markets to reap higher profits, on average, than firms in loose markets, because the “tighter” the oligopoly the higher is the likelihood of collusion. In turn, collusion will make the oligopoly more like a cartel and allow it to charge monopoly prices and reap monopoly profits. The presence of potential entrants will always limit monopolistic behavior.

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