Question

If an industry evolves from monopolistic competition to oligopoly, we would expect a. the four-firm concentration ratio to decrease. b. the four-firm concentration ratio to increase. c. the four-firm concentration ratio to remain the same. d. barriers to entry to weaken.

Answer 1

Answer: b. the four-firm concentration ratio to increase.

Explanation: The four-firm concentration ratio should increase when and competition shifts from monopoly to oligopoly. A ratio that exceeds 40 percent is an indication of oligopololistic competition while a ratio of less than 40 percent is an indication of monopolistic competition. Concentration ratios are used to show the extent of market control of the largest firms in the industry. When it is computed using the four largest firms in an industry, it measures the extent to which the four largest firms dominate the sales of a good.

An easy reference rule is that an oligopoly exists when the top four firms in the market account for more than 60% of total market sales in the industry.