Q11.8 Why is the four-firm concentration ratio only an imperfect measure of market power?

Ans:
The four firm concentration ratio measures the share of domestic output produced by the top
four firms in an industry. As such, it is only an imperfect measure of monopoly power. First,
concentration ratios ignore the magnitude of foreign competition. Such competition limits the
market power of industry leaders in automobile manufacturing,
electronics, television equipment and many other industries. And second,concentration ratios
compiled using national data fail to recognize regional
market power due to the local character of markets such as those for the newspapers, dairy pr
oducts, waste disposal, and so on. Thus, although foreign competition cansometimes cause
concentration ratios to overstate true market power by ignoring the
regional characteristics of many markets, concentration ratios can also understate monopoly
power in some instances.

Q11.9 The statement You get what you pay for reflects the common perception that high
prices indicate high product quality and low prices indicate low quality. Irrespective of
market structure considerations, is this statement always correct?
Ans. No, not necessarily. In both perfectly competitive and monopolistically competitive
markets P = AC in long run equilibrium. Given efficient methods of production, it is
reasonable to infer a close relation between prices and the costs of production, and hence
product quality, in such markets. However, in both monopoly and oligopoly markets P >
AC in long-run equilibrium. Therefore, there may only be a weak relation between prices
and the costs of production (product quality) in these markets. Thus, the statement You get
what you pay for may be quite descriptive of vigorously competitive markets, but is less true
in instances of imperfectly competitive markets.

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