Question

the semiconductor (processing chip) industry has been consolidating due to the increased cost of producing chips due to technological advances. 10 years ago, it cost $10,000,000 to design a new chip. now it costs anywhere from $100,000,000 to $200,000,000.

experts say you need to have large scale operations to build your own factories and create these incredibly small products.

why would you expect to see fewer firms in the industry?

use a formula for the maximum number of firms in a market for this industry

Answer 1

It is clear that huge investments act as a barrier to entry. Expertise required is huge and also this industry is capital intensive. Hence a few firms control higher market share. As firms are few, advertisement expenses are also higher. Companies often engage in price wars.

This is an example of oligopoly and concentration ratio can be calculated to check market concentration.

Add market shares of top four companies, if this adds to more than 40% then it is oligopoly ( Few firms controlling market).