Chapter 4 Outline
A. Concentration Ratios
1. Concentration ratios, crude measures of market power in an economy, are the percent of domestic output produced by the four largest firms in a particular industry.
a. A high concentration ratio indicates that a few firms produce most of the industry output and may indicate a significant amount of market power in the industry.
2. High concentration ratios do not necessarily imply market power.
a. If an industry with a high concentration ratio faces significant foreign competition, it may behave competitively.
b. An industry with a high concentration ratio may not be able to restrict output very much if there are no barriers to restrict other firms from entering the industry in response to high, monopoly profits.
B. Market Power Over Time
1. Some studies indicate that the U.S. economy is becoming more competitive.
a. Increased competition from imports has decreased market power.
b. Legal action by the government has made it more difficult for firms to merge and engage in price fixing.
c. Government has eliminated many regulations that enhanced market power.
C. Barriers to Entry and Other Sources of Market Power
1. There are four major sources of market power in the United States.
a. Technical conditions can create entry barriers.
1. Technical conditions might be such that a technically efficient firm will supply all of a good that consumers wish to purchase at the going price.
a. Monopolies created by these technical conditions are sometimes referred to as natural monopolies.
b. Access to the supply of a product or an essential input for a product can create a barrier to entry.
c. Existing firms may develop and maintain market power through product differentiation.
d. Monopolies may be created by government regulations.
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