FINAL RESEARCH STEP BEFORE STARTING A BUSINESS Macroeconomics ECON224-1104B-22 Victoria Rock November 19, 2011
IntroductionIn this research we looked into two different types of Industries and their Concentration Ratio.When starting your own business there are a number of factors to consider. You can’t just say,“Ok, I’m opening a business”, and then start producing and selling your product. One of thefirst things to look into is how many companies are producing and selling the same kind ofproduct, and what the concentration ratio is and how it effects the industry you are going into.
Industry A Industry A which has 20 firms and a concentration ratio of 30% would be considered amonopolistic completion with the chance of running a monopoly. Four characterists of aMonopoly are: One single firm selling all output in a market A unique product Restrictions on entry into and exit out of the industry Specialized information about production techniques unavailable to other potential producers. If an industry has these kinds of characteristics, then that industry has market control. Amonopolistic industry tends to fall short of each perfectly completive characteristic. (Monopoly,Characteristics) There are many monopolistic competition companies. Although they sell thesame things they are perceived through commercials as being different. Some examples are inthe fast food industries such as McDonalds, Burger King, and Wendy’s. When there is an increase in demand for a product that changes the price of goods, somelong run adjustments are expected. When it comes to the long run, the firms available in theindustry will be able to change the product scale and choose to either enter or leave theindustry. New firms will enter the industry to take advantage of the profits of scale which willresult to the down pressing of the market price to the long run equilibrium minimum averagecost. (Chapter 16: Monopplistic Competition and Product Differentiation) Due to the fact thatthe industry experiences a monopolistic competition each firm has the power of setting theirprices to attract more customers. The adjustment process implies the relationship between theindustrial properties and the CR. The market exhibits the elements of both monopoly andperfect competition when monopolistic competition occurs, especially when the CR is low. LowCR wipes out temporary increase in price and drives the economy back to the long runequilibrium level therefore creating a characteristic like competitive market. (Chapter 16:Monopplistic Competition and Product Differentiation)
Industry B An industry with 20 firms and a concentration ratio of 80% is referred to as a highconcentration industry. This is due to the fact the industry lies within the 0 to 50 percentconcentration ratio. This type of industry is referred to as an Oligopoly and mostly governmentregulations are concerned with industries which are within this category. There are threecharacteristics of an Oligopoly industry and they are: An industry dominated by a small number of large firms Firms sell either identical or differentiated products The industry has significant barriers of entry If a company has these kinds of characteristics have an inclination to keep prices rigged andhas the pursuit of non-price competition instead of price competition. (Oligopoly,Characteristics) Firms in this form of industry attain and retain market control through barriers of entry. Themost noted entry barriers are: Exclusive resource ownership Patents and copy Government restrictions High start-up cost Because of these barriers it is much harder to enter and existing firms maintain greatermarket control. Some examples of an oligopoly industry include the steel industry, aluminum,film, television, cell phone companies and gas. (Chapter 15: Oligopoly)
Conclusion The market shares of the largest firms in the industry determine if the industry will eitherhave low concentration or high concentration. Industry A has a low concentration of 30% sincethe largest firm in the industry has a smaller market share compared to the largest firm inindustry B. This is the reason why industry B has a higher market concentration. It is possiblefor smaller firms to thrive and make profits in an industry with a higher concentration. Withthe right exposure and strategies, as well as the right attitude will make it easier for a smallerfirm to work with larger firms in terms of goods or services offered.
Reference"Chapter 15: Oligopoly." Krugman, P. & Wells, R. Economics. New York: Worth Publishers, 2009. 387- 414."Chapter 16: Monopplistic Competition and Product Differentiation." Krugman, P. & Wells, R. Economics. New York: Worth Publishers, 2009. 415-432.Monopoly, Characteristics. n.d. 17 November 2011. <http://www.amosweb.com/cgi- bin/awb_nav.pl?s=wpd&c=dsp&k=monopoly,+characteristics>.Oligopoly, Characteristics. n.d. 18 November 2011. <http://www.amosweb.com/cgi- bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly,+characteristics>.