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Four Firm Concentration Ratio


Four Firm Concentration Ratio

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So one method to evaluate the concentration in an industry, how much market power the firms have is to use the four firm concentration ratio. Let's check that one out. So this one is pretty simple. The four firm concentration ratio. What we have to do is we're gonna look at the output of the top four firms, the top four firms in the industry the most output. Right? When I say top four, it's the four with the largest output. And we're gonna divide that by the total industry output. Okay, so we're gonna take the four 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 has shown below. What is the four 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 uh saxophone players. And then of course everyone's favorite brian supplying one here at the bottom. Cool, so we've got two 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 gonna go down here and start adding, right 3 50 plus, 100 plus 50 plus to 20 plus 80 plus 60 plus 300 plus one. Okay, so we're getting a total output total output, which is just the sum of all of those. I got 11 61. As long as I didn't fat finger this and mess up my calculation our total output is 11 61. So the other step is to find the four largest firms in this industry. Right? So we gotta find the four biggest numbers. Here we go. We've got john Coltrane producing 3 50. Cannonball no Bradford marsalis down here is popping out 300. Looks like cannonball Adderley has got the next one with 2 20 and then charlie parker with 100 solos. Cool. So now we just add up these four, right the top four in the industry. So this is output of four largest is going to be equal to 3 50 plus 100 plus 2 20 plus 300. Okay, so let's add all those together and let's see what their output is. 3 50 plus 100 plus 2 20 plus 300. That gives me 9 70 9 70 right there. So we're almost done. We're almost ready to to tell us our answer here. So the four firm concentration ratio for firm, I'm just gonna put C. R. I don't know if that's a real acronym. I just got lazy four firm concentration ratio. That's going to be the output of the four largest firms, 9 70 divided by the total industry output of 11 61. And this gives us our four firm concentration ratio 9 70 divided by 11 61. It is zero point uh I'll say 835. I'll go to three decimals here. So 83 we can put that as a percentage 83.5%. So what does that tell us? 83.5%. That means that the four largest firms in this industry account for 83% of the total output. Right? So that does give us some information of how concentrated the industry is. Right? There's 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 four firm concentration ratio. Cool, let's do that now.

A summary of the market for trumpet solos is shown below. What is the four-firm concentration ratio?

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