Assignment Type: Individual Project Deliverable Length: 2–3 pages Points Possibl

Question

Assignment Type: Individual Project Deliverable Length: 2–3 pages
Points Possible: 150 Due Date: 10/16/2011 11:59:59 PM CT

You want to start a company, and are trying to decide between two different industries. You are doing your final research before you write your business plan.

Industry A has 20 firms and a Concentration Ratio (CR) of 30%

* What is the name for this type of industry?
*
Describe some of this industry's characteristics.
*
If you were in this industry and there was an increased demand for the product that pushed up the price of goods, what long-run adjustments would you expect?
*
What does your anticipated adjustment process imply about the CR for the industry?

Industry B has 20 firms and a Concentration Ratio (CR) of 80%.

*
What is the name for this type of industry?
*
Describe some of this industry's characteristics.
*
What are some reasons why this industry has a high CR while Industry A had a low CR?
*
Is it possible for smaller firms to thrive and profit in Industry B? Why or why not?

Explanation / Answer

The type of industry with 20 firms and a (CR) of 30% is called a Low Concentration Industry Some of the Characteristic of this industry would be Monopolistic and competitive because when the Concentration ratio is monopolistic competition occurs. Of course the percentage rate has to be of 0 to 50 percent. Fast Food companies such as KFC or McDonalds are some examples of this type of industries, therefore if the Industry is less than 40% it is a Monopolistic Competition. Source(s): Paul Krugman & Robin wells Economics second edition Princeton University Simply put, the higher the CR the more monopolistic an industry is (or in this case oligopolistic). The 4 firm concentration ratio is usually the standard measure of this. In the example w/ 30% CR you can assume there are likely low barriers to entry and the industry is very competitive. If demand increases in this industry and pushes prices up in the short-term you will see more companies enter in the long term. Since the price will come back down it implies a competitive industry. The second example is a much less competitive industry. Since there are barriers to entry or competitiveness (i.e. economies of scale/scope) you will likely have a long term increase in price since more companies won't come in to push prices down via competition. It is unlikely a small firm can survive in the second industry with a price leadership model. An industry with 20 firms and the CR of 30%, from a market structure standpoint, if the four firm concentration ratios is less than 40% it is monopolistic competition. If the industry has 20 firms but the CR for the industry is 80% instead of 30%, from a market structure standpoint, if the four firm concentration ratio is greater than 40% the market is an oligopoly. For some industries, few firms may be currently operating in the market but competition might be fierce, with firms regularly entering and exiting the industry. Even potential entry might be enough to maintain competition. Price leadership is a situation in which a market leader sets the price of a product or service, and competitors feel compelled to match that price. The theory of contestable markets suggests that even if there is only one seller, the seller may be forced to act as if there were many more. Sellers have the incentive to act in this way because it will increase profits. The key to their success is their ability to restrict sales. A perfectly contestable market is one in which entry and exits are absolutely costless

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