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In this hypothetical case, the 3-firm concentration ratio is Further examples Banking The Herfindahl — Hirschman Index H-H Index This is an alternative method of measuring concentration and for tracking changes in the level of concentration following mergers.
If the index is belowthe market is not considered concentrated, while an index above indicates a highly concentrated market or industry — the higher the figure the greater the concentration. Key characteristics The main characteristics of firms operating in a market with few close rivals include: Interdependence Firms that are interdependent cannot act independently of each other.
A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions.
For example, if a petrol retailer like Texaco wishes to increase its market share by reducing price, it must take into account the possibility that close rivals, such as Shell and BP, may reduce their price in retaliation. Strategy Strategy is extremely important to firms that are interdependent.
Because firms cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or their non-price activity.
In other words, they need to plan, and work out a range of possible options based on how they think rivals might react.
Oligopolists have to make critical strategic decisions, such as: Whether to compete with rivals, or collude with them.
Whether to raise or lower price, or keep price constant. Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do. Sometimes it pays to go first because a firm can generate head-start profits. Barriers to entry Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market.
These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist.
Natural entry barriers include: Economies of large scale production. If a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred.
Ownership or control of a key scarce resource Owning scarce resources that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport. High set-up costs High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits.
Many of these costs are sunk costswhich are costs that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future.
Predatory pricing Predatory pricing occurs when a firm deliberately tries to push prices low enough to force rivals out of the market.
Limit pricing Limit pricing means the incumbent firm sets a low price, and a high output, so that entrants cannot make a profit at that price.
This is best achieved by selling at a price just below the average total costs ATC of potential entrants. This signals to potential entrants that profits are impossible to make. Superior knowledge An incumbent may, over time, have built up a superior level of knowledge of the market, its customers, and its production costs.
This superior knowledge can deter entrants into the market. Predatory acquisition Predatory acquisition involves taking-over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out. As with other deliberate barriers, regulators, like the Competition and Markets Authority CMAmay prevent this because it is likely to reduce competition.
Advertising Advertising is another sunk cost - the more that is spent by incumbent firms the greater the deterrent to new entrants. Exclusive contracts, patents and licences These make entry difficult as they favour existing firms who have won the contracts or own the licenses.
For example, contracts between suppliers and retailers can exclude other retailers from entering the market. Another key feature of oligopolistic markets is that firms may attempt to collude, rather than compete.
If colluding, participants act like a monopoly and can enjoy the benefits of higher profits over the long term. Types of collusion Overt Overt collusion occurs when there is no attempt to hide agreements, such as the when firms form trade associations like the Association of Petrol Retailers.
Covert Covert collusion occurs when firms try to hide the results of their collusion, usually to avoid detection by regulators, such as when fixing prices.
Tacit Tacit collusion arises when firms act together, called acting in concert, but where there is no formal or even informal agreement. For example, it may be accepted that a particular firm is the price leader in an industry, and other firms simply follow the lead of this firm.
If firms do collude, and their behaviour can be proven to result in reduced competition, they are likely to be subject to regulation. In many cases, tacit collusion is difficult or impossible to prove, though regulators are becoming increasingly sophisticated in developing new methods of detection.The answer in this question is A 92%.
The concentration ratio of industry A in which it has the most highest concentration among the four industries is 92% while the industry who has the lowest concentration ratio is Industry D with 58% concentration ratio.
Concentration ratio A concentration ratio is the ratio of the combined market shares of a given number of firms to the whole market size. It is commonest to consider the 3-firm, 4-firm or 5-firm concentration ratio.
Industrial concentration was traditionally summarized by the concentration ratio, which simply adds the market shares of an industry’s four, eight, twenty, or fifty largest companies.
The ratios of concentration, Kcu and Kzn are those for the copper and zinc concentrates, respectively, with Rcu and Rzn the percentage recoveries of the metals in their corresponding concentrates.
Concentration ratios can also provide information regarding industry's competitiveness and the scope for the economies of scale. The estimates in this article are consistent with those published in the Blue Book, Pink Book and Input-Output Analyses publications.
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