Question

Assume a friend approaches you with a business idea and tells you that she has determined the concentration ratio of the industry in which she intends to compete is 80%. Which of the following is an appropriate conclusion that you might share with her? There are thousands of firms in this industry and each is insignificant. The industry in which she intends to compete has some very large firms, relative to total sales. Firms in this indsutry are price takers. This industry has only one firm and it is a monopoly.

Answer 1

Concentration ratio shows the cumulative market share of the largest firms in the industry. The ratio can range from 0-100%. There are 3 , 4 and 5 firm concentration ratio. This takes into account the 3 , 4 or 5 largest firms in that particular industry.

This ratio helps in identifying to what extent the market is oligopolistic. A ratio which is between 0-50% is considered to have low concentration. Above 60% is that an oligopoly exists and if it is 100% it is an indication of a monopoly.

Since, the concentration ratio provided is 80% then, the statement "The industry in which she intends to compete has some very large firms relative to total sales" will be the appropriate conclusion. As , the ratio indicated the top large firms constitute 80% of the total market share which is a high percentage implying there are a few large firms that constitute majority of the sales but there exists other small firms as well in the industry.