So one method to evaluate the concentration in an industry, how much market power the firms have, is to use the 4 firm concentration ratio. Let's check that one out. So this one's pretty simple. The 4 firm concentration ratio, what we have to do is we're going to look at the output of the top 4 firms. The top 4 firms in the industry, the most output, right? When I say top 4, it's the 4 with the largest output, and we're going to divide that by the total industry output, okay? So we're going to take the 4 largest firms, add them together, and divide by the total for the industry. So let's go ahead and do an example here. It's the easiest way to learn this. So we've got a summary for the market of saxophone solos as shown below, what is the 4 firm concentration ratio? Right, so I'm just going all over the place with these products, it doesn't really matter what the product is, right? Let's go ahead and check this out. We've got a bunch of suppliers here, a bunch of famous, awesome saxophone players, and then of course, everyone's favorite, Brian, supplying 1 here at the bottom. Cool. So we've got 2 steps here. First, we need to find the total industry output, right? How many saxophone solos are being produced in this industry? Well, that's just a matter of adding up everybody's output, okay? So let's do that together and I'm just going to go down here and start adding, right? 350 plus 100 plus 50 plus 220 plus 80 plus 60, plus 300, plus 1. Okay. So we're getting a total output. Total output which is just the sum of all of those, I got 1161 as long as I didn't fat finger this and mess up my calculation. Our total output is 1161. So the other step is to find the 4 largest firms in this industry, right? So we got to find the 4 biggest numbers. Here we go. We've got John Coltrane producing 350, Cannonball, no. Bradford Marsalis down here is popping out 300. Looks like Cannonball Adderley's got the next one with 220 and then Charlie Parker with a 100 solos. Cool? So now we just add up these 4, right? The top 4 in the industry. So this is the output of the 4 largest is going to be equal to 350 plus 100 plus 220 plus 300. Okay. So let's add all those together and let's see what their output is. 350 plus 100 plus 220 plus 300. That gives me 970. 970 right there. So we're almost done. We're almost ready to tell us our answer here. So the 4 firm concentration ratio, 4 firm, and I'm just going to put CR. I don't know if that's a real acronym, I just got lazy. 4 firm concentration ratio, that's going to be the output of the 4 largest firms, 970 divided by the total industry output of 1161, and this gives us our 4 firm concentration ratio. 9701161, it is 0.835. I'll go to 3 decimals here. So 0.835, we could put that as a percentage, 83.5%. So what does that tell us? 83.5%, that means that the 4 largest firms in this industry account for 83.5% of the total output, right? So that does give us some information of how concentrated the industry is, right? There are a few large firms producing most of the output. Cool? Let's go on to the next video and do a practice where you guys can try the 4 firm concentration ratio. Cool, let's do that now.
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12. Monopoly
Four Firm Concentration Ratio
12. Monopoly
Four Firm Concentration Ratio - Online Tutor, Practice Problems & Exam Prep
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The 4-firm concentration ratio is a key measure of market power, calculated by dividing the total output of the four largest firms by the total industry output. For example, if the top four firms produce 970 units out of a total of 1161, the concentration ratio is 0.35 or 83.5%. This indicates that a significant portion of the market output is controlled by a few firms, highlighting the industry's concentration level and potential oligopoly structure. Understanding this ratio is crucial for analyzing competition and market dynamics.
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Four Firm Concentration Ratio
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ProblemA summary of the market for trumpet solos is shown below. What is the four-firm concentration ratio?
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