Question

In the small town of Geneva, there are five 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 four- firm concentra tion ratio for the town's watch-making industry is: a. 5 c. 90 b. 70 d. 100

Short answer

Option c, 90.

Step-by-step solution

Understand the Four-Firm Concentration Ratio

The four-firm concentration ratio measures the total market share of the four largest firms in an industry. It helps us understand the extent of market competition. In this case, we need to find the total output of the four largest watch makers in Geneva.

List the Firms' Outputs

We have five firms with the following outputs: 30, 20, 20, 20, and 10 watches per year. These represent the annual production by each firm.

Identify the Four Largest Firms

Sort the firms' outputs in descending order to identify the four largest: 30, 20, 20, and 20 watches per year. These are the outputs of the four largest firms.

Calculate Total Output of Larger Firms

Sum the outputs of the four largest firms: 30 + 20 + 20 + 20 = 90 watches per year. This represents the combined output of the four largest firms.

Calculate Total Industry Output

To find the total market output, sum all firm's outputs: 30 + 20 + 20 + 20 + 10 = 100 watches per year.

Compute the Four-Firm Concentration Ratio

The four-firm concentration ratio is the combined output of the four largest firms divided by the total industry output, multiplied by 100 to get a percentage. Thus, it is \( \frac{90}{100} \times 100 = 90\% \).

Choose the Correct Option

The four-firm concentration ratio is 90, which corresponds to option c.

Key concepts

Market Competition

Market competition refers to the degree of rivalry between companies in a specific industry. In a competitive market, many firms vie for the same group of consumers. The level of competition affects pricing, product quality, and innovation. A highly competitive market typically sees lower prices and greater innovation, as firms strive to attract consumers.
In the context of Geneva's watch-making industry, measuring market competition involves examining the output levels of its firms. If a few firms dominate the market, competition is less intense. Conversely, a more distributed output among numerous firms indicates higher competition. The four-firm concentration ratio is one tool used to gauge this competition.

Industry Output

Industry output is the total production within a specific sector over a certain period. It reflects the industry's health and market potential. Industry output considers the overall capacity and efficiency of all firms within that market.
Using our example from Geneva, the watch industry's output is the sum of all watches produced by the city's watch-making firms: 100 watches per year.

• Firm 1: 30 watches
• Firm 2: 20 watches
• Firm 3: 20 watches
• Firm 4: 20 watches
• Firm 5: 10 watches

These numbers together give a clearer picture of the market's production capability, helping analysts understand how much product is available for consumption in the market.

Market Share

Market share represents the proportion of total industry sales that a particular company secures in a specific period. It indicates a firm's competitiveness and dominance in the market. The larger a firm's market share, the more influence it holds.
For Geneva's watch firms, calculating market share is crucial to understanding each firm's role in the market. The largest firms produce a significant share of the total output, indicating their dominance. Market share for each firm is calculated as the firm's output divided by total industry output. For example, Firm 1's market share is \( \frac{30}{100} \times 100 = 30\% \). This tells us Firm 1 holds a prominent position in Geneva's watch industry.

Concentration Ratio Calculation

The concentration ratio measures market structure and the extent of competition. Among different concentration ratios, the four-firm concentration ratio specifically analyzes the combined market share of the top four firms in the market.
To calculate it:

• Identify the top four firms by their output.
• Sum their outputs to get the combined total.
• Divide by the total industry output and multiply by 100 to convert into a percentage.

In Geneva, the four largest watch firms produce 90 watches, and the total industry's output is 100 watches. Thus, the four-firm concentration ratio is \[\frac{90}{100} \times 100 = 90\%\]This result indicates a high concentration, meaning these four firms dominate the watch-making market, limiting competition.