Concentration ratios have often been used to note the tightness of an oligopoly market. A high concentration ratio indicates a tight oligopoly market, and a low concentration ratio indicates a loose oligopoly market. Would you expect firms in tight markets to reap higher profits, on average, than firms in loose markets? Would it matter if the markets were contestable? Explain your answers.

The concentration ratio classifies a market according to the percentage of sales reported by the top 4 firms in the industry. If the concentration ratio of a market is greater than 60%, that market is considered a tight oligopoly. On the contrary, if the concentration ratio of a market is between 40% and 60%, that market is considered a loose oligopoly. That is to say, a tight oligopoly is controlled only by a few firms that have a significant market power which means no competition. On the other hand, a loose monopoly has more firms that have distributed market power and more competition. Therefore, it is very common that tight markets obtain higher profits than loose markets because of the number of firms and their market power. It is very important that markets are contestable because competition influences the price elasticity of demand. When there are more competitors, the demand of the market is more elastic than a market with only a few firms. Additionally, competition is associated with high-quality products, lower prices, and significant consumer surplus.