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A "3 firm concentration ratio of 80%" would mean _________

User AbiSaran
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Final answer:

A "3 firm concentration ratio of 80%" indicates that the three largest firms own 80% of the market share combined, hinting at a less competitive market. However, the concentration ratio only provides a snapshot and should be evaluated with other measures like the Herfindahl-Hirschman Index for a comprehensive view.

Step-by-step explanation:

A "3 firm concentration ratio of 80%" would mean that the three largest firms in the market, when combined, control 80% of the total market share. This is an indicator of market concentration, which can imply a less competitive market environment. The concentration ratio is a measure used to evaluate the degree of competition in a market and is related to the concept of the Herfindahl-Hirschman Index, which provides a more nuanced view of market structure by considering the distribution of market shares across all firms rather than just the largest ones.

For example, a market in which three firms have market shares of 40%, 30%, and 10% respectively would have a 3 firm concentration ratio of 80%. However, this ratio doesn't tell us about the competitive pressures from smaller firms or the market dynamics. Thus, while concentration ratios can be useful for providing a quick snapshot of market concentration, they have limitations and should be considered alongside other metrics like the Herfindahl-Hirschman Index for a full assessment of market competition.

User Episodex
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