Concentration Ratios

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Have you ever wondered how industries are determined oligopolies or monopolies? In this paper I will discuss how concentration ratios are used to determine total market shares within four specific industries. I will also discuss the levels of competition within those industries and how oligopolies can benefit society. Case, Fare, and Oster defines concentration ratio as the share of industry output in sales or employment accounted for by the top firms (2009). They are used to measure the total output produced by a certain number of firms within an industry.

Four-firm concentration ratios are used to measure the total market share of the four largest firms in an industry. The industries that will be discussed are fluid milk manufacturing, women’s and girls’ cut and sew dress manufacturing, envelopes, and electronic computer manufacturing. Four-firm concentration ratios range from 0-100%. Monopolistic competition is taking place when the concentration ratio is 0%. Perfect competition to oligopoly is 0-50%, 50-80% is likely an oligopoly, 80-100% ranges from oligopoly to monopoly, and 100% concentration ratio is a monopoly.

Levels of competition can be determined by the ranges of the concentration levels. As mentioned above these levels range from 0-100% or no concentration to high concentration. The four-firm concentration ratio for fluid milk manufacturing was 42. 6%. This falls in the low concentration range. This tells me there is a high level of competition in this industry and one manufacturer does not have a significant market share. The women’s and girls’ cut and sew dress manufacturing four-firm concentration ratio is 21. 6%.

This percentage also falls in the low concentration range which suggests that there is a high level of competition within the industry. The four-firm concentration ratio for the envelopes industry is 51. 1%. The medium level of concentration ranges from 50-80%. This ranges from perfect competition to oligopoly. In my opinion the level of competition within this industry is high. Finally, the four-firm concentration ratio for electronic computer manufacturing is 75. 5% which also falls in the medium level of concentration.

The closer the four-firm concentration percentage is to 80% the closer this firm is to an oligopoly and the least amount of competition there is within the industry. Oligopoly is an industry that is characterized by a few dominant firms and products produced may be homogenous or differentiated (Case, Fare, and Oster 2009). In this type of industry there are high barriers for entry and there is limited price competition. In my opinion out of the industries discussed electronic computer manufacturing is the closest to an oligopoly.

There are 465 companies within the industry and the four-firm concentration ratio is 75. 5% (United States Census Bureau 2002). The leading firms in this industry are Hewlett- Packard, Acer, Dell, Apple, and Lenovo. Hewlett-Packard, Apple, and Dell are American multinational computer manufactures, Acer is a multinational computer manufacturer based out of Taiwan, and Lenovo is Chinese based multinational computer manufacturer. In my opinion oligopolies are not always bad for societies.

The firms within these industries will take advantage of the economies of scale which will lower the cost of production and prices. Firms like HP, Acer, Apple, Dell, and Lenovo can mass produce at lower average costs. Here computers can be produced at lower costs which means they can be sold to the consumer at lower prices. If computers were produced by a large number of small firms as oppose to a small number of large firms the cost of the product would be higher. Another reason why oligopolies can be good for society is through innovations that can develop the level of technology.

This can promote economic growth and expand production capabilities which can lead to a higher living standard. In the computer manufacturing industry HP, Acer, Dell, Apple, and Lenovo have the opportunity to expand production capabilities by access to a large number of resources and are motivated to innovate through competition within the industry. References Case, K. E. , Fair, R. C. , and Oster, S. E. (2009) Principles of Microeconomics (9th ed). Upper Saddle River, New Jersey: Pearson Prentice Hall. United States Census Bureau. (2002) http://www. census. gov/prod/ec02/ec0231sr1. pdf

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