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Suppose two industries exist,a and b, both of which have concentration ratios of 80%
Suppose two industries exist,a and b, both of which have concentration ratios of 80%.
In A, the four largest firms control the following shares of the market, respectively: 60%, 10%, 7%, and 3%.
In B, the four largest each have a 20% share of the market.
a. In which would you expect more potential for monopoly power?
b. What does this say about using concentration ratios as a measure of the potential for monopoly power?
Expert Solution
a. In which would you expect more potential for monopoly power? You would expect more market power to exist in market A because one firm controls 6 times the market size as its next closest competitor. This allows the largest firm the ability to charge higher prices and act a monopoly.
b. What does this say about using concentration ratios as a measure of the potential for monopoly power? The fact that both industries have the same concentration ratio shows that the measure can be a misleading way to measure market power. In A, one firm was clearly dominant while the top 4 firms in B were equally dominant. The concentration ratio, however, shows no difference between the industries.
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