Assignment:

Select 3 to 5 Industries and Calculate 4 and 8 Firm

Concentration Ratio with Explanation.

Course Code: EM: 534

Course Title: Industrial Organization & Management of
Technology

Submitted To
Dr. Syed Golam Maola
Professor
Department of Management
Faculty of Business Studies
University of Dhaka

Submitted By
Mesbah Uddin Mahmud Ratul
ID No: 3-19-41-030
Department: Management (EMBA),
Faculty of Business Studies

Date of Submission: 10-11-2020

 INTRODUCTION

 Monopoly Power:

Monopoly power refers to a firm’s ability to charge a price higher than its
marginal cost. Monopoly power typically exists where there is low elasticity of
demand and significant barriers to entry.

Why is it that a firm in perfect competition is a price-taker while a monopoly can

set any price it deems fit? The answer lies in the nature of the demand curve
facing each firm. In a perfect competition, no firm has any market power because
they face a horizontal demand curve. They must supply at the prevailing market
price or sell nothing. A monopoly, on the other hand, need not worry about any
competition. Since a monopolist is the only firm in the market, if the elasticity of
demand for its product is low, he determines the market price. In other words, a
monopolist has infinite monopoly power.

The main source of monopoly power is the elasticity of demand for the product
concerned. Now, the elasticity of demand for a firm’s product is determined by
three factors. Those are;
(i) Elasticity of market demand,
(ii) The number of firms in the market, and
(iii) The nature of interaction among the firms.

 Measurement of Monopoly Power:

1. Concentration Ratio:

Concentration ratio refers to the fraction of total market sales controlled by the
largest group of sellers.

The inclusion of the market shares of several firms in the concentration ratio
rests upon the possibility that large firms will adopt a common price- output
policy which may not be very different from the one they would adopt if they
were under unified management.

But here difficulty arises that they may not do so. Therefore, a high concentration
ratio may be necessary for the exercise of monopoly power but it is not
sufficient.

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2. Profit-Rate as a Measure:

J.S. Bain used profit-rate as a measure of monopoly power. By high profits,

economists mean returns sufficiently in excess of all opportunity costs which
potential new entrants desire for entering the industry.

The size of super-normal profits which a firm is able to earn is an indication of its
monopoly power. In perfect competition, a firm earns only normal profits. In
monopoly, new entrants will not normally compete away monopoly profits. But
there will be some level of profits at which new firms will find it worth taking the
risk of trying to break the monopoly.

The stronger the monopolists position, the greater the profits he will be able to
earn without attracting new rivals. In short, it is said that neither concentration
ratio nor profit-rate are ideal measures of the degree of monopoly power, both
are of some value nor both are widely used.

3. Lerner’s Measure:

It is the oldest measure and is based on the difference between the price charged
by the monopolist and his marginal cost. Bober gives the formula 1/E. Thus,
degree of monopoly power varies inversely with the elasticity of demand for the
commodity.

However, the more commonly used formula is:

Degree of monopoly power = (P-MC) / P
Where P is price charged by the monopolist and MC his marginal cost.

In perfect competition,
P = MC and the formula (P-MC)/P gives zero answer indicating no monopoly
power. If the monopolized product is a free good, MC = 0 and the formula
registers unity. The index of monopoly power thus varies from zero to unity.
Since monopolized goods are seldom free, monopoly power is seldom as high as
unity.

This method is not free from defects as:

(i) Firstly it does not measure non-price competition. Secondly, monopoly power
is shown itself not only in high price but also in output restriction. Output may be
restricted by under-utilization of capacity already in existence or by restricting
new entry.
(ii) Lerner’s method throws no light on these aspects of monopoly power.

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 Concentration Ratio:
The concentration ratio, in economics, is a ratio that indicates the size of firms in
relation to their industry as a whole. Low concentration ratio in an industry
would indicate greater competition among the firms in that industry, compared
to one with a ratio nearing 100%, which would be evident in an industry
characterized by a true monopoly.

The percentage of market share taken up by the largest firms. It could be a 4 firm
concentration ratio (market share of 4 biggest) or an 8 firm concentration ratio.

Concentration ratios are used to determine the market structure and

competitiveness of the market. For example, an oligopoly is defined when there
is an 8 firm concentration ratio of greater than 50%

Importance of concentration ratios:

The degree of competition. If the eight-firm concentration ratio rises from 40% to
60%, this is an indication of a fall in competitive pressures. It could lead to higher
prices for consumers

Regulatory oversight. If there is a four-firm concentration ratio of over 80%, then

there is greater scope for collusion and abuse of monopoly power. In this kind of
industries, the government may need to use a regulator to check monopoly
power isn’t being abused. For example, the government has a regulator for
railways, electricity and gas – where the market is dominated by a few small
firms.

Concentration ratios and contestability:

One feature of concentration ratios is that they do not indicate the level of
contestability. A contestable market has freedom of entry and exit. The threat of
competition is sufficient to keep prices low – even if the concentration ratio is
quite high.

FORMULA
Sum of 4 Leading Firms Sale
 4 Firm Concentration Ratio =
Total Sale of Industry

Sum of 8 Leading Firms Sale

 8 Firm Concentration Ratio =
Total Sale of Industry

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 PHARMACEUTICAL INDUSTRY
 In 2018 there were around 257 Pharmaceutical company among them 8
Pharmaceutical Industries who sold the most in 2018 are as follows:
1. Square 33.7 Billion Taka;
2. Incepta 22.7 Billion Taka;
3. Beximco 16.9 Billion Taka;
4. Renata 10.6 Billion Taka;
5. Healthcare 10.6 Billion Taka;
6. Opsonin 10.4 Billion Taka;
7. ACI 9 Billion Taka; and
8. Eskayef 9 Billion Taka.

Leading 4 & 8 Firm Concentration Ratio is presented in the Table:

Total 4-firm 8-firm

Leading 4 firms Leading 8 firms
Industry sale concentration concentration
sale in 2018 sale in 2018
in 2018 ratio ratio

205 Billion
84 Billion Taka 123 Billion Taka 0.41 0.6
Taka

Pharmaceutical industry in our country doing well from more than two decades and
now doing cross-border business as well. If we see the whole industry, it is clear that
some big firms are dominating the market. If we look at the concentration ratio of
the big four firms, we get a result that it is covering 41% of the sale of the whole
industry sale but we can’t say that they are doing monopoly business but if we look
at the figure it is near to the figure to consider it as monopoly market. On the other
hand, if we do the 8 firm concentration ratio it is clear that those firm are controlling
the market over rest of the 249 firms and it is a monopoly market. This is a matter to
be monitored because if the other industries are not doing well then there must be
lack of competitiveness in the market for some specific reasons. So, there must be a
monitoring process from the regulators as it is related to the public health and safety
that what’s the reason behind the slow growth of other firms who are not doing
business is this competitive market or is there any force or bad marketing process
done by the big firms who are just getting the control over the Pharmaceutical
market.

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 STEEL INDUSTRY
 In 2018 there were around 300 Steel company among them 8 Steel Industries
who sold the most in 2018 are as follows:
1. AKS 49.4 Billion Taka;
2. BSRM 48.3 Billion Taka;
3. GPH 9.8 Billion Taka;
4. Shahriar 7.9 Billion Taka;
5. RSRM 7.7 Billion Taka;
6. Salam 6.1 Billion Taka;
7. Apolo 3.9 Billion Taka; and
8. SAlam 3.8 Billion Taka.

Leading 4 & 8 Firm Concentration Ratio is presented in the Table:

Leading 4 Leading 8 4-firm 8-firm
Total Industry
firms sale in firms sale in concentration concentration
sale in 2018
2018 2018 ratio ratio
450 Billion 115.5 Billion
137 Billion Taka 0.26 0.30
Taka Taka

Steel industry is a fully competitive business in our country. Many of the Steel
industries are now doing cross-border business as well. If we see the whole industry,
it is clear that the market is very competitive and having around 300 steel factories in
2018 most of the industries are doing business well and their growth are satisfying
the owners if we go through all the ratio analysis. But as we are here working on
concentration ratio it is good to see that if we do 4 firm concentration ratio its
around 26% and if we do 8 firm concentration ratio it is around 30% both the ratios
clearly explain that the market is not a monopoly market and a competitive market
helps to keep quality and increase quality of the product to do more business than
the competitors. As the steel market is related to the construction and which is an
important industry which must ensure safety to the people. So, competitive steel
industry is a positive sign that we are still getting better quality product as the
companies are trying to gain more market share than others.

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 CERAMIC INDUSTRY
 In 2018 there were around 66 Ceramic companies among them 8 Ceramic
Industries who sold the most in 2018 are as follows:
1. Munno 9.81 Billion Taka;
2. Far 8.17 Billion Taka;
3. Akij 7.63 Billion Taka;
4. Shine pukur 7.63 Billion Taka;
5. Paragon 6.54 Billion Taka;
6. Rak 2.57 Billion Taka;
7. Fu Wang 0.59 Billion Taka; and
8. China Bangla 0.47 Billion Taka.

Leading 4 & 8 Firm Concentration Ratio is presented in the Table:

Leading 4 Leading 8 4-firm 8-firm
Total Industry
firms sale in firms sale in concentration concentration
sale in 2018
2018 2018 ratio ratio
54.5 Billion 33.25 Billion 43.40 Billion
0.61 0.80
Taka Taka Taka

Ceramic Industry is doing very well as people in our country are more concern about
their living standard. Ceramic is not a luxury good but its near to that because people
find it beautiful and useful to use in daily life and in decoration. After seeing the total
sale of the industry which is good to be honest but when we do the 4 firm and 8 firm
concentration ratio it is clear that Ceramic industry is not in a completive situation. 4
big firms in this industry is covering 61% of the whole sales figure and if we look on 8
firm concentration ratio it is covering 80% of the whole market sale. Which is
alarming because the rest of the firms are not even close according to the ratios. It is
clearly a monopoly market where big ones are doing business and other are still
suffering to get a satisfactory market share. So this industry must be monitored so
that entrepreneurs are not suffering for any invisible negative market force to run
their business or to enter the market.

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 CONCLUSION
Bangladesh is now a developing country so it is mandatory to enhance the market of
all industries to do cross border business but in a competitive field. We don’t want
monopoly market as it is not suitable for our country. We need to ensure quality
against price and also after sales service. Industries must be responsible and
accountable regarding their business and it is possible when the market is not a
monopoly market. Concentration ratio is the perfect way to calculate the market
ratio of an industry and to understand the business environment. A competitive
market is always better to do business as it is suitable for the consumers.

Monopoly market is good when it is not making consumer unhappy regarding the
quality, price, after sales service and safety as well. But in our country it is seen that
whenever an industry is doing business in a monopoly market, consumers doesn’t
get the product or service for which they are paying for. So, govt. regulators must
monitor the market whenever it loses its competitiveness. Concentration ratio is the
easiest way to evaluate any industry that it is in active monopoly market or in an
inactive monopoly market. Proper monitor and a competitive market helps both the
business owners and consumers. Business must be done in the way it is meant to be
and for this competition is not a drawback but a better way to compare and lead the
market by producing or giving better service to the consumers.

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