Question

In the U.S., economists use the combined market share of the four largest companies as an indicator of how “concentrated” the business sector is. The concentration ratio of the top 4 companies (CR4) in the food/CPG retailing sector has been increasing and now is above .41 or forty-one percent. List and explain the two major reasons why the Federal Trade Commission (FTC) has not taken action in response to the rising CR4 in the Food/CPG retailing sector.

Answer 1

FTC usually takes action against the such combinations and mergers that lead to concentration of economic power. Thus combinations might be inimical to the fair competition in market. But all concentrations are not detrimental to the public welfare.

• First, the food retailing sector concentration has substantially reduced the cost of production and so the price of food items. Thus, such concentrations is encouraged.
• Second, it is difficult to exploit customers in Food retailing sector, since it is easy to enter market if existing firms begin to exploit the customers by charging higher prices. this facility constitutes the contestable market.

To sum up, cost effectiveness and contestable natural market make ground higher concentration in such market.