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Chapter 11: Q. 13 (page 272)

How do we measure a four-firm concentration

ratio? What does a high measure mean about the extent of competition?

Short Answer

Expert verified

The concentration of the four largest dominant firms in the industry.

Step by step solution

01

Step1. Concept 

Monopoly power in any market can be measured by various methods. These include four-firm concentration ratio, Hirschman Herfindahl Index, etc.

02

Step2. Explanation, Calculation and Implication 

Four firm concentration ratio is simply the addition of the concentration of the largest four, dominant firms in the industry.

For eg. there are only 6 firms in an industry with the following mentioned concentration:

A- 60%

B- 12%

C- 10%

D- 8%

E- 7%

F- 3%

The four firm concentration ratio is simply the addition of the concentration of firms A, B, C and D; i.e. 0.9 in our example (90%).

Higher the ratio, higher is the monopoly power and lesser is the competition.

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Most popular questions from this chapter

Use the following information to answer the next three questions. In the years before wireless phones, when telephone technology required having a wire running to every home, it seemed plausible that telephone service had diminishing average costs and might require regulation like a natural monopoly. For most of the twentieth century, the national U.S. phone company was AT&T, and the company functioned as a regulated monopoly. Think about the deregulation of the U.S. telecommunications industry that has occurred over the last few decades. (This is not a research assignment, but a thought assignment based on what you have learned in this chapter.)

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