Question

Use Table 11.5 to calculate the four-firm concentration ratio for the U.S. auto market. Does this indicate a concentrated market or not? $$\begin{array}{l|l}\hline \text { GM } & 19 \% \\\\\hline \text { Ford } & 17 \% \\\\\hline \text { Toyota } & 14 \% \\\\\hline \text { Chrysler } & 11 \% \\\\\hline\end{array}$$

Short answer

The four-firm concentration ratio for the U.S. auto market is \(61\% \), calculated by adding the market shares of GM (\(19\%\)), Ford (\(17\%\)), Toyota (\(14\%\)), and Chrysler (\(11\%\)). This indicates a moderate level of concentration, as it is neither highly concentrated (above \(80\%\)) nor less concentrated (below \(40\%\)). Therefore, the U.S. auto market is not highly concentrated but has a moderate concentration level.

Step-by-step solution

Understand the concentration ratio

The concentration ratio is a measure of the combined market share of the top firms in a particular industry. It provides a simple way to determine the level of competition in the market. The four-firm concentration ratio is the sum of the market shares of the four largest firms in the industry.

Identify the firms and their market shares

According to the given table, the market shares of the four largest firms in the U.S. auto market are as follows: - GM: \(19\% \) - Ford: \(17\% \) - Toyota: \(14\% \) - Chrysler: \(11\% \)

Calculate the four-firm concentration ratio

To calculate the four-firm concentration ratio, we need to add the market shares of these four firms. Four-Firm Concentration Ratio = GM + Ford + Toyota + Chrysler = \(19\% + 17\% + 14\% + 11\% = 61\% \)

Determine if the market is concentrated or not

The four-firm concentration ratio we calculated is at \(61\% \). Generally, a market is considered highly concentrated if the four-firm concentration ratio is above \(80\%\). This means that a single or a few firms control a large proportion of the market. If the concentration ratio is below \(40\%\), then it's considered a less concentrated market, with more firms operating. In our case, the concentration ratio of the US auto market is neither highly concentrated nor less concentrated. This ratio indicates a moderate level of concentration in the market, with the four largest firms holding \(61\% \) of the market share, and the remaining \(39\% \) is controlled by the other smaller firms. So, we can conclude that the U.S. auto market is not highly concentrated, but it has a moderate concentration level.

Key concepts

Market Concentration

Market concentration is a term used in economics to describe the extent to which a small number of firms dominate an industry. It's an indication of the competitiveness of the market and can significantly influence the market dynamics, including prices, quality of goods, and innovation.

A common measure of market concentration is the concentration ratio, which sums up the market shares of the leading firms in the industry. The four-firm concentration ratio, specifically, is the total market share held by the four largest companies. A high concentration ratio usually means that an industry has an oligopolistic structure, where a few firms hold substantial power over the market. Conversely, a low ratio suggests a more competitive market structure with many players.

Economics

Economics is the social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices on allocating resources to satisfy their wants and needs. Market concentration plays a crucial role in economic theories and models, particularly when analyzing market structures, evaluating competition, and crafting regulatory policies.

The balance between competition and concentration is essential for a healthy economy, as it ensures that there are enough players to encourage innovation and fair pricing, without having so many that the benefits of economies of scale are lost.

Industrial Organization

Industrial organization, a field within economics, examines the behavior of firms in different market conditions, types of market structures, and the outcomes of these structures for consumers and the economy at large. One of its main foci is to determine how the structure of a market – which can be visualized through measures such as the four-firm concentration ratio – affects competition and economic performance.

The study of industrial organization helps in understanding how and why firms behave the way they do, and provides insights into the most efficient ways to organize economic activity in various industries. Policies regarding antitrust laws, competition regulation, and market liberalization are heavily influenced by concepts and research stemming from industrial organization.

Oligopoly

An oligopoly is a market structure in which a small number of firms control the majority of the market share. This type of market is characterized by limited competition and can result in high barriers to entry for new firms.

In an oligopolistic market, firms are interdependent, which means that the actions of one firm can significantly impact the revenues of others. Because of this interdependence, there may be a tendency among firms to collude, tacitly or overtly, to set prices and outputs that favor the oligopolists, often at the expense of consumer welfare. The four-firm concentration ratio is a critical tool for identifying oligopolistic markets, with higher ratios signaling a greater likelihood of oligopolistic behaviors.