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. Be sure to show your work.

Four-firm concentration ratio is the proportion of total output in an
industry that's produced by the four largest firms in the industry. It
is commonly used to indicate the degree to which an industry is
oligopolistic and how market control is held by the four largest firms
in the industry. This implies that the four largest firms in the
industry produce just 30% of the output, whereas 70% of the output is
produced by the remaining 16 firms. This industry is monopolistically
competitive, where there are many producers and many consumers in a
given market, consumers have clearly defined preferences, the goods
and services are heterogeneous, and there is freedom of entry. If the
demand for the product rises and pushes up the price for the good, the
industry being monopolistically competitive, in the long run, new
firms would come into the market. With increased production, the cost
will be stabilized at the prior levels. In the long run, thus, the
profit rates of all firms should converge on the same competitive
return on capital, risk differences aside. If the CR is less than 40%,
the industry is defined as Monopolistic Competition. If the long the
profit rates reduce to zero, it would become a perfect competition in
long run with very low CR.

The four largest firms in the industry produce 80% of the output,
whereas just 30% of the output is produced by the remaining 16 firms.
With such a high CR, the industry is tending towards having high
characteristics of being a monopoly. Monopoly is a market situation
where there is only one provider of a product or service. In a
monopoly there is one sole provider although, in some cases, that sole
provider may have been created by consolidating several formerly
independent firms. Monopolies are characterized by a lack of economic
competition for the good or service that they provide (and a lack of
viable substitute goods), as well as high barriers to entry for
potential competitors in the market. Monopoly can be created if there
is simply one or selected few providers of the goods or services
either because of technological reasons, or legal and
cultural-political constraints. For example, protection of
intellectual property creates monopoly power by preventing competitors
from copying product innovations. It is quite difficult for smaller
firms to thrive and profit in such a industry. The market share is
captured by the prevalent firm.