For the following statement, please indicate whether the statement is true, fals

Question

For the following statement, please indicate whether the statement is true, false, or uncertain, and explain why. If the statement has two parts, or if it is partly true and partly false, explain both parts. The evaluation of your answer focuses on the quality of your explanation.

Given the following information: The market for a metals-based product has a four-firm seller concentration ratio of 62 percent, and most firms in the industry currently are earning economic profits that are about 15 percent of total revenue. It is a commodity product, so product differentiation is minimal. The minimum efficient scale for a single production facility is equal to about 2 percent of the size of total industry sales. Two of the largest eight firms in the industry serve buyers throughout the market’s geographic area using one or two production facilities. There are no government policies that focus specifically on this market.

Statement to evaluate: A good prediction is that the four-firm seller concentration ratio for this industry will decline during the next five to ten years.

Explanation / Answer

The statement is true.

The four firm concentration ratio is 62% and the firms are earning positive economic profit with very little product differentiation. It means that the market is resembling a perfectly competitive market and firms are the price takers. Due to the firms making positive economic profit, more firms will enter into the market and firms will become the price takers. In this case, demand of commodity by the top 4 players, will shift to the other firms in the market. As a result, the market share of top 4 players will come down. So, four firm concentration ratio will also come down.
Further, there are 2 firms who have largest manufacturing facility. It means that they have the lowest cost of product and low price also. Then, it is possible that the market share of these 2 biggest players may not come down unless other firms increase the size of production facility and create economy of scale. Due to positive economic profit, it is always possible that the existing firms or newly entrant firm, will build a huge facility in the coming 5 to 10 years. It will reduce the four firm concentration ratio.

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