Question

Is there any relationship between the size of concentration ratios of markets and the level of profitability of markets? Explain.

Answer 1

The concentration ratio indicates whether an industry is comprised of a few large firms or many small firms. The four-firm concentration ratio, which consists of the market share of the four largest firms in an industry, expressed as a percentage, is a commonly used concentration ratio. Similar to the four-firm concentration ratio, the eight-firm concentration ratio is calculated for the market share of the eight largest firms in an industry. The three-firm and five-firm are two more concentration ratios that can be used. Today, the various activities of the firms cause the markets to move away from the full competitive structure and to form the fierce competition markets (monopoly, monopoly competition, oligopoly markets). The purpose of these activities is to increase their market share, to reduce their costs, to increase their income, and hence their profits. To achieve this, it is necessary to go to differentiation of goods, to establish economies of scale, to make agreements between firms, to apply various marketing techniques (especially advertising activities) . In the theory of economics, if the conditions of perfect competition in the market are valid, the most desired goods and services are produced by the firms with minimum cost and the resources are used in the most effective way. For this reason, since companies also earn normal profits, consumers are able to purchase goods and services they desire at a minimum price. In this respect, perfect competition market is considered as the most effective market structure . However, in sectors where there is a lack of competition and a high concentration ratio, a disproportionate price system and misallocation of resources cause consumers to suffer damage . When examining today's market formations, monopolistic competition and oligopoly market structures appear to be predominantly located between the perfect competition market and the monopoly market. The most commonly used methods in determining the market structures are the N-Firm Concentration Rate and the Herfindahl-Hirschman Index in the context of the Structure-Conduct-Performance (SCP) approach . In industrial economics studies, the relationship between market structure and performance in the sector is generally considered. The key concepts here are structure, conduct, and performance (SCP) that help predict industry performance. Al-Obaidan , notes that the Paradigm of Building Behavior and Performance supports a direct relationship between market concentration and competition level. According to the market efficiency.
Description: The market concentration ratio measures the combined market share of all the top firms in the industry. ‘Market Share’ is used as a reference here in the formulae. It could be sales, employment statistics, number of people using a company’s services, number of outlets etc. The value of top firms or top ‘n’ firms may be three or maximum five. If the top firms keep on gaining market share, then we say that the industry has become highly concentrated. To understand market concentration, let’s first understand ‘concentration’. Concentration within an industry can be defined as the degree at which a small number of firms make up for the total production in the market. If the concentration is low, it simply means that top ‘n’ firms are not influencing the market production and the industry is considered to be highly competitive. On the other hand, if the concentration is high, it means that top ‘n’ firms influence the production or services provided in the market the industry then is said to be oligopolistic or monopolistic.