Unit 3-Concentration

• What determines the number of firms in an industry?

  How we define the market or industry
• What is a concentration ratio?

  Measure of market share by largest firms
• What does a higher concentration ratio indicate?

  More concentrated industry with fewer firms
• What does a lower concentration ratio suggest about an industry?

  It is more competitive
• What is the formula for calculating an N-firm concentration ratio?

  Total sales of N firms / Total sales of all firms X 100
• What does a 3-firm concentration ratio measure?

  Market share of the three largest producers
• When would a 5-firm concentration ratio be used?

  When several large firms dominate the market
• What does a concentration ratio of 80% suggest?

  The industry is oligopolistic
• What indicates an industry is an oligopoly?

  Five firms having 75% of the market
• Why is further research needed beyond the concentration ratio?

  To understand firm behavior in the industry
• How might a concentration ratio affect government decisions on mergers?

  It indicates potential market power concentration
• What can comparing concentration ratios over time indicate?

  If an industry is becoming more or less competitive