INDUSTRY
STRUCTURES
In industry
concentration, the
four-firm concentration ratio (CR4) is described
as “the combined
share of market of the four largest firms in the industry. A
CR4 of 40% or higher represents a
consolidated industry. Most
industries when they reach a CR4 of 40% or so begin to exhibit
oligopolistic behavior. The larger the percentage, the more
consolidated the industry. A CR4 of 70% or 80% represents a highly
consolidated industry. There is of course nothing magical about using
four firms to compute the
concentration ratio; one can compute
five-firm concentration ratio (CR5), eight-firm concentration ratio
(CR8), and so on.” (Scherer, 1996).
The
second alternative measure of industry concentration is by use of the
Herfindahl
Index. This is the tool that the Federal Trade commission will invoke
to decide of company acquisition and merger strategies to comply with
the antitrust legalities.
(Scherer, 1996).
An
industry with 20 firms and the CR is 30% is describe as fragmented
under the under the structure conduct – performance - model for
industrial organization economics. (Scherer, 1996). A high demand
for product and an increase in price means that there is excess
capacity that has been created. Therefore these fragmented firms in
that industry will, in order to compete for the anticipated profit
growth, will start to compete aggressively. Thereafter the industry
in the long run will first experience boom and later burst
adjustments. They will then be faced by profit problem and some will
close down in the long run, or will be taken over by the bigger
competitor or will quit the market all the same. The adjustment
process for this industry will require that they are more
consolidated in order to survive such market forces. (Scherer, 1996)
An industry of a CR of 80% is
characteristic of a consolidated one under the structure of conduct-
performance- model for the industry organization. Some of the reason
why some industries have high CR while others have low CR are that
Consolidate one (> 40%) have high entry barriers, differentiated
products, established brands and often very high profits. These also
experience aggressive wars such as price wars, because profits are at
stake. Other time the competition and rivalry is unpredictable. On
the other hand industries with low CR (< 40%), have low entry
barriers and encourage the entry of newcomers if prices are
favorable. Therefore they are often full in capacity. (Scherer,
1996).
This explains why smaller
firms cannot thrive and earn decent profits in the industry of high
CR (>40%) as individual. If they want to survive then they must
adopt an oligopolistic stand of competition in the market. Under
this arrangement, the firms will have to mutually agree on a mutually
independent move where they will all be conscious of their effect to
other competitors. In this case all competitive moves are responded
to together as long as there is no breach of antitrust laws. These
moves have to be gentle and calculated. So a more civilized industry
structure is maintained with gentle rivalry. Thus the rivals all
engage in very low level competition that will not force other out of
the industry to the niches level. (Oster 1994)
LIST
OF REFERENCES
Oster,
S.M. (1994). Modern
competitive analysis. New
York, NY: Oxford University
Press
Scherer,
F.M. (1996). Industry
structure, strategy, and public policy.
Reading, MA:
Addison-Wesley