If the four-firm concentration ratio for industry X is 80:
- a. the industry is monopolistically competitive.
- b. the four largest firms account for 80 percent of total sales.
- c. each of the four largest firms account 20 percent of total sales.
- d. the four largest firms account for 20 percent of total sales.
The correct answer and explanation is:
The correct answer is:
b. The four largest firms account for 80 percent of total sales.
Explanation:
The four-firm concentration ratio (CR4) measures the total market share held by the four largest firms in an industry. It is used as an indicator of market concentration and competition. A CR4 of 80 means that the top four firms control 80% of the industry’s total sales.
Market Structure Implications:
- A CR4 of 80 suggests a highly concentrated market, possibly an oligopoly. In an oligopoly, a few dominant firms exert significant control over prices and output.
- This level of concentration reduces competition, making it easier for firms to engage in collusion or price leadership strategies.
Why the Other Options Are Incorrect:
- (a) The industry is monopolistically competitive – Incorrect. Monopolistic competition involves many small firms with differentiated products. A CR4 of 80 is too high for such a market.
- (c) Each of the four largest firms account for 20 percent of total sales – Incorrect. The CR4 only tells us the combined market share, not how it is distributed among the top firms. One firm could hold 50%, another 20%, and the remaining two could have 5% each.
- (d) The four largest firms account for 20 percent of total sales – Incorrect. This misinterprets the CR4, which states that the top firms together hold 80%, not 20%.
Conclusion:
A CR4 of 80 indicates a high degree of market concentration. This typically reduces competition and increases the likelihood of strategic interactions among firms, impacting prices, output, and innovation.
Here is an infographic visually representing the four-firm concentration ratio (CR4), illustrating how the top four firms control 80% of total sales. Let me know if you need any modifications or further explanations!
