You want to start a company, and are trying to decide between two different industries. You are doing your final research before you write your business plan.
Industry A has 20 firms and a Concentration Ratio (CR) of 20%
* What is the name for this type of industry?
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Describe some of this industry's characteristics.
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If you were in this industry and there was an increased demand for the product that pushed up the price of goods, what long-run adjustments would you expect?
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What does your anticipated adjustment process imply about the CR for the industry?
Industry B has 20 firms and a Concentration Ratio (CR) of 85%.
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What is the name for this type of industry?
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Describe some of this industry's characteristics.
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What are some reasons why this industry has a high CR while Industry A had a low CR?
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Is it possible for smaller firms to thrive and profit in Industry B? Why or why not?
Has to be explain in 2-3 pages
Industry A with 20 firms and a concentration ratio (CR) of 20% is referred to as a competitive or low-concentration industry.
Characteristics of this industry may include:
1. Many firms competing against each other for market share.
2. Low barriers to entry, allowing new firms to easily enter the market.
3. Prices are typically determined by supply and demand forces.
4. High level of product differentiation, with firms offering unique features or services.
If there was an increased demand for the product in Industry A, pushing up the price of goods, the long-run adjustments expected would be:
1. Existing firms may increase production to meet the increased demand.
2. New firms may enter the market to take advantage of the higher prices.
3. The overall supply in the industry would increase, which may eventually lead to a decrease in price due to increased competition.
The anticipated adjustment process implies that the concentration ratio (CR) for Industry A would likely decrease over time. As more firms enter the market and competition intensifies, the market share of each individual firm would decrease, resulting in a lower concentration ratio.
Industry B with 20 firms and a concentration ratio (CR) of 85% is referred to as an oligopoly or high-concentration industry.
Characteristics of this industry may include:
1. A small number of dominant firms hold a significant market share.
2. High barriers to entry, limiting new firms from easily entering the market.
3. Firms may have substantial control over prices and market conditions.
4. Product differentiation may exist, but not to the same extent as in a competitive industry.
Some reasons why Industry B has a high concentration ratio while Industry A had a low concentration ratio could include:
1. Strong economies of scale, making it difficult for smaller firms to compete on cost.
2. Established brand loyalty and customer preferences favoring larger firms.
3. High levels of capital investment required, discouraging new entrants.
4. Potential collusion or strategic behavior among the dominant firms to maintain market control.
In Industry B, it may be challenging for smaller firms to thrive and profit due to the high concentration of dominant firms and the barriers to entry. The large firms in this industry may have significant advantages, such as economies of scale, established relationships with suppliers and customers, and greater financial resources. These advantages make it difficult for smaller firms to compete effectively and gain market share.