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The Concentration Ratio

There is a standard measure of concentration ratio called the four firm ratio concentrations. In cases where the concentration ratio is below forty per cent the industry is said to be monopolistic. Therefore an industry with twenty firms and concentration ratio stands at thirty per cent is a monopolistic competition. Such an industry has some characteristics and it comprises of many small firms which are small compared with the market size.

One characteristic is that the industries has similar products being sold by individual firms but are not identical. There is high mobility in that firms are free to enter and exit the industry. This means that a firm that fails to meet its costs can freely leave the industry while that with pursuit of getting positive profits can as well enter (Brakman 2004). Here buyers tend not to know everything but they are rich in information concerning alternative prices. There is no difference in price between products which could eliminate several goods as substitutes. The firms in every product group are many and still on the side of those preparing to get into the market, the number is great. Each firm in this industry sets its on terms concerning exchange regardless of the decision's impact on competitors. Every firm is entitled to a market power where it can raise prices and not lose its customers.

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In case of great demand and increased price of products, the long run adjustment would be to reach equilibrium with an output which generates the economies of scale and increases returns to the scale. This adjustment would be achieved using a two fold adjustment process where one is the entry and exit in and out enabling firms to earn no economic profit. The second is where firms concentrate on profit maximization which ensures that the output quantity is sufficient. These adjustments helped to stabilize the concentration ratio of the industry.

An industry which has twenty firms but a concentration ratio of eighty per cent is said to fall under oligopoly. This type of industry has various characteristics in that it maximizes profits through production at a point where marginal revenue is the same with marginal cost. They set their own price and have high barriers to entry. Action of one firm in this industry can greatly affect the actions to be taken by other firms since the firms are few (Friedman 1983). They retain abnormal profits in long run and the products may appear homogeneous. They tend to have full knowledge of the cost and the demand function although information between firms might be incomplete.

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The concentration ratio is defined as measures of total output produced by an industry through a number of firms. In monopolistic competition there are many firms there diving the output by the number gives a less value than in oligopoly which typically comprises of few big firms. Smaller firms are faced with a difficulty in thriving at oligopoly not unless the barriers to entry are eased.

In conclusion it is evident that there is a great difference between monopolistic competition and oligopoly in terms of the types of firms involved in each and the characteristics they perceive.

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