To answer this question, we first need to understand what the Four-Firm Concentration Ratio (CR) is and how to compute it. The CR is a measure of industry concentration and is calculated by adding the market shares (measured by sales or production) of the four largest firms in the industry.
In this case, the industry has 20 firms and a CR of 20%. This means that the four largest firms in the industry account for 20% of the market share.
A CR of 20% suggests a relatively low concentration in the industry, with a large number of firms competing against each other. This indicates a more competitive market structure, where no single firm has a significant market power.
If the demand for the product rises and pushes up the price, it would likely lead to increased profits for the firms in the industry. In the long run, this change in demand would attract new firms to enter the industry, leading to an increase in the number of firms. This entry of new firms would result in more competition and would likely lead to a decrease in the CR for the industry. Therefore, the adjustment process implies that the CR for the industry would decrease as more firms enter and compete.
Now, let's consider a different scenario where the industry has 20 firms, but the CR is 80% instead of 20%. This means that the four largest firms in the industry account for 80% of the market share.
A CR of 80% suggests a high concentration in the industry, with a small number of firms dominating the market. This indicates a less competitive market structure, where a few firms have significant market power.
There could be several reasons why this industry has a high CR. It could be due to barriers to entry, such as high initial investment costs, brand loyalty, patents, or government regulations, which make it difficult for smaller firms to enter and compete. It could also be due to economies of scale, where larger firms are able to achieve lower average costs compared to smaller firms, giving them a competitive advantage.
In such an industry with a high CR, smaller firms may find it challenging to thrive and profit. However, it is not impossible. Smaller firms can try to differentiate their products or services, focus on niche markets, or use innovative strategies to carve out a market share for themselves. They can also form alliances or collaborate with other firms to increase their bargaining power and compete effectively. Additionally, changes in market conditions or technological advancements may create opportunities for smaller firms to enter and succeed in the market.