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Definition And Calculation Of The Concentration Ratio

Economics notes

Definition And Calculation Of The Concentration Ratio

➡️ Collusion is an agreement between two or more firms in an oligopolistic market to act in concert to limit competition and increase profits. This can be done through price fixing, market sharing, and other anti-competitive practices.
➡️ The Prisoner➡️s Dilemma is a game theory concept that illustrates the difficulty of achieving cooperation between two players. It involves two players who must decide whether to cooperate or defect. If both cooperate, they both receive a reward. If one defects, they receive a higher reward while the other receives nothing.
➡️ Collusion and the Prisoner➡️s Dilemma are important concepts to understand in oligopolistic markets, as they can help firms maximize profits and reduce competition. Understanding these concepts can help firms make better decisions and increase their profits.

What is the concentration ratio in economics and how is it calculated?

The concentration ratio is a measure of market power that indicates the degree of market concentration in a particular industry. It is calculated by adding up the market shares of the top firms in the industry and expressing it as a percentage. For example, if the top four firms in an industry have market shares of 30%, 25%, 20%, and 15%, respectively, the concentration ratio would be 90% (30% + 25% + 20% + 15%).

How does the concentration ratio affect competition in an industry?

The concentration ratio can be used to assess the level of competition in an industry. A high concentration ratio indicates that a few firms dominate the market, which can lead to reduced competition and higher prices for consumers. On the other hand, a low concentration ratio suggests that the market is more competitive, with many firms competing for market share and driving down prices.

What are the limitations of using the concentration ratio as a measure of market power?

While the concentration ratio can provide useful information about market concentration, it has some limitations as a measure of market power. For example, it does not take into account the size of firms outside the top few, which may also have significant market power. Additionally, it does not consider the potential for new entrants to disrupt the market or the impact of technological change on market dynamics. Therefore, it is important to use the concentration ratio in conjunction with other measures of market power to get a more complete picture of market competition.

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