Question

(a) Suppose if you calculate the 4-firm concentration ratio of cable companies in Austin it will be equal to one (Cable Sphinx is the only provider of Cable TV services in Austin). Should we calculate the 4-firm concentration ratio for the entire state of Texas, or for the southern part of Texas or just for Austin if we want to look at the concentration in the cable industry? Please give an explanation.

(b) Does a concentration ratio of 1 imply that the industry is very concentrated and therefore is a monopoly (or close to one) and consumers have very little choice? Please explain.

Answer 1

a) 4 firm comcenconcent ratio should be done for the entire state of Texas if we want to look at the concentration of entire cable industry. The main reason to take the entire state is that in 4 firm concentration ratio they will measure the total Market share of largest four firms in the industry. In this case also when we want to look up after Cable industry than we have to see which are the largest cable companies in the entire Texas as it shows the largest firms in the entire Texas rather than few regions.

b) Yes if the concentration ratio is one it indicate that there is a monopoly in the industry. Monopoly means a single seller will have the authority on entire market. When the concentration ratio value is one it means the size of the frims in the industry and their relationship with industry is same. Concentration ratio will be one only when their is one single firm in the market.