Market concentration has a ready interpretation. The higher the concen-
tration ratio, the greater is the degree of market dominance by a small num-
ber of firms. Indeed, a common practice is to distinguish among different
market structures by degree of concentration. For example, an effective
monopolyis said to exist when the single-firm concentration ratio is above 90
percent, CR 1 90. A market may be viewed as effectively competitivewhen
CR 4 is below 40 percent. If CR 4 40 percent, the top firms have individual
market shares averaging less than 10 percent, and they are joined by many firms
with still smaller market shares. Finally, one often speaks of a loose oligopoly
when 40 percent CR 4 60 percent and a tight oligopolywhen CR 4 60 per-
cent. Monopolistic competition, discussed in the previous chapter, typically
falls in the loose-oligopoly range.
About three-quarters of the total dollar value of goods and services (gross
domestic product or GDP) produced by the U.S. economy originate in com-
petitive markets, that is, markets for which CR 4 40. Competitive markets
included the lion’s share (85 percent or more) of agriculture, forestry, fish-
eries, mining, and wholesale and retail trade. Competition is less prevalent in
manufacturing, general services, and construction (making up between 60 and
80 percent of these sectors). In contrast, pure monopoly accounts for a small
portion of GDP (between 2 and 3 percent). Tight oligopolies account for about
10 percent of GDP, whereas loose oligopolies comprise about 12 percent.^2 In
short, as Table 9.1 shows, while concentrated markets are relatively rare in the
U.S. economy, specific industries and manufactured products are highly
concentrated.
Because the notion of concentration ratio is used so widely, it is important
to understand its limitations. The most serious limitation lies in the identifica-
tion of the relevant market.A market is a collection of buyers and sellers exchang-
ing goods or services that are very close substitutes for one another. (Recall
that the cross-elasticity of demand is a direct measure of substitution. The
larger the impact on a good’s sales from changes in a competitor’s price, the
stronger the market competition.) Concentration ratios purport to summa-
rize the size distribution of firms for relevant markets. However, it should be evi-
dent that market definitions vary, depending on how broadly or narrowly one
draws product and geographic boundaries.
First, in many cases the market definitions used in government statistics are
too broad. An industry grouping such as pharmaceutical productsembraces many
distinct, individual product markets. Numerous firms make up the overall con-
sumer-drug market (concentration is low), but individual markets (drugs for
ulcers and blood pressure) are highly concentrated. Similarly, government statis-
tics encompass national markets and therefore cannot capture local monopolies.356 Chapter 9 Oligopoly(^2) As one might expect, categorization of market structures by concentration is not hard and fast.
The preceding data are based on W. G. Shepherd, The Economics of Industrial Organization, Chapter 3
(Upper Saddle River, NJ: Prentice-Hall, 2003).
c09Oligopoly.qxd 9/29/11 1:32 PM Page 356