Industry structure is often measured by computing the Four-Firm
Concentration Ratio. Suppose you have an industry with 20 firms and
the CR is 30%. How would you describe this industry? Suppose the
demand for the product rises and pushes up the price for the good.
What long-run adjustments would you expect following this change in
demand? What does your adjustment process imply about the CR for the
industry?
Now consider that the industry has 20 firms but the CR for the
industry is 80% instead of 30%. How would you describe this industry?
What are some reasons why this industry has a high CR while the other
industry had a low CR? Is it possible for smaller firms to thrive and
profit in such an industry? How? Contrast the effects on market
efficiency if the dominating firms use a price leadership model versus
a contestable markets model.