Question

In the small town of Geneva, there are 5 firms that make watches. The firms' respective output levels are 30 watches per year, 20 watches per year, 20 watches per year, 20 watches per year, and 10 watches per year. The fourfirm concentration ratio for the town's watch-making industry is: a. 5 b. 70 c. 90 d. 100

Short answer

The four-firm concentration ratio is 90.

Step-by-step solution

Identify Top Firms

List the output levels of the firms: 30, 20, 20, 20, and 10 watches per year. Identify the top four firms based on their output levels. The top four firms here are the ones with outputs 30, 20, 20, and 20 watches.

Calculate Total Output

Add together the outputs of all five firms to find the total watch production in the town. The calculation is: 30 + 20 + 20 + 20 + 10 = 100 watches per year.

Sum Top Four Outputs

Add together the outputs of the top four firms: 30, 20, 20, and 20 watches, which sums to 90 watches per year.

Compute Four-Firm Concentration Ratio

The concentration ratio is calculated as the total output of the four largest firms divided by the total output of all firms, expressed as a percentage. Thus, the ratio is \(\frac{90}{100} \times 100\% = 90\%\).

Key concepts

Four-Firm Concentration Ratio

The Four-Firm Concentration Ratio is a measure used to gauge the level of competition within an industry. It represents the combined market share of the four largest firms in a particular market. Calculating this ratio helps us understand how much of the market these top firms control, indicating whether the market leans more toward being competitive or concentrated.

In the context of the exercise, the four largest watch-making firms in Geneva control 90% of the market. This high concentration ratio suggests limited competition, as these few firms dominate the industry. Such a scenario may lead to reduced consumer choice and higher prices.

• A high four-firm concentration ratio indicates less competition.
• It is an essential tool for identifying potential monopolistic or oligopolistic market structures.
• A lower ratio suggests a more competitive marketplace.

The significance of understanding this ratio lies in its ability to inform policy decisions and business strategies within industrial organization.

Industrial Organization

Industrial Organization is a branch of economics that studies how firms operate within industries, including the nature of competition and market structures. It examines the strategic behavior of firms, market power, and the impact of regulatory policies. Understanding industrial organization helps explain the dynamics within any industry, including the factors that drive competition and how firms can influence market outcomes.

In Geneva’s watch-making industry, industrial organization principles are at play. The dominance of a few firms, as shown by a high concentration ratio, suggests that strategies like pricing and output decisions are likely influenced by these significant players.

• Analyzes how firms' decisions affect market outcomes.
• Informs antitrust policies and competitive regulation.
• Looks into strategic interactions among firms.

Students interested in learning more about how markets work will find industrial organization a crucial field of study as it digs deep into company behaviors and the structures governing industries.

Market Structure

Market structure refers to the organization and characteristics of a market. It involves aspects such as the number of firms, the level of competition, and the potential for new players to enter the market. Various types of market structures exist, ranging from highly competitive to monopolistic.

Based on the four-firm concentration ratio in the Geneva watch industry, the structure can be classified as more concentrated, possibly indicating an oligopoly where a few firms have significant control.

• Different market structures include perfect competition, monopolistic competition, oligopoly, and monopoly.
• An oligopoly is characterized by a small number of firms with considerable market power.
• The presence of barriers to entry is often a feature of more concentrated markets.

Understanding market structure is crucial for businesses and policymakers as it influences pricing strategies, industry regulation, and the potential for competition.

Oligopoly

An oligopoly is a market structure in which a small number of firms hold the majority of market share. In such markets, companies may influence prices and output levels, often leading to less competitive environments. Oligopolies are common in industries where market entry barriers are high, preventing new competitors from entering easily.

The watch-making industry in Geneva, with its high four-firm concentration ratio, is a classic example of an oligopoly. Here, the four dominant firms likely determine pricing and output decisions, impacting overall market health.

• Oligopolies may lead to collaboration or competition among firms.
• These firms often engage in strategic decision-making to maintain market position.
• Consumers may face higher prices and less choice due to the reduced competition.

Recognizing an oligopoly within an industry can help in understanding the economic dynamics at play and in designing better regulatory frameworks to protect consumer interests.