Final answer:
Concentration ratio measures market concentration in an industry using the combined market share of the largest firms. It helps determine the industry's competitiveness and level of monopoly power.
Explanation:
Concentration ratio is a tool used to measure the degree of monopoly power in an industry by calculating the combined market share of the largest firms typically the top four to eight firms. It helps in understanding the level of market concentration and whether an industry reflects characteristics of monopolistic competition or perfect competition.
In the context of a market for replacing automobile windshields, the four-firm concentration ratio is calculated by adding the market shares of the four largest firms, providing insight into the market structure and competitiveness.
A higher concentration ratio indicates a more concentrated industry where firms are more likely to consider their rivals' behavior, while a lower concentration ratio reflects characteristics of more competitive markets.
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