Concentration ratio
From Wikipedia, the free encyclopedia
 |
The examples and perspective in this article may not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page. |
In economics, the concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. It is calculated as the sum of the percent market share of the top n firms. This may also assist in determining the market structure of the industry. One commonly used concentration ratios the four-firm concentration ratio, or C4, which consists of the market share, as a percentage, of the four largest firms in the industry. [1]
The concept is best illustrated with examples. Consider the following hypothetical industry:
| Firm | Market Share |
|---|---|
| AlphaCo | 15% |
| Beta Corporation | 10% |
| Gamma, Inc. | 10% |
| Delta & Company | 25% |
| Epsilon Enterprises | 20% |
| ZetaCorp | 5% |
| (All others) | 15% |
The four-firm concentration ratio, or C4, of this industry is 25+20+15+10=70. Similarly, this industry's C5 is 25+20+15+10+10=80. These results indicate a high degree of concentration.
| Firm | Market Share |
|---|---|
| Eta Corporation | 2% |
| Theta, Inc. | 1% |
| Iota Industries | 2% |
| Kappa & Company | 3% |
| LambdaCo | 1% |
| MuCorp | 1% |
| (All others) | 90% |
The four-firm concentration ratio, or C4, of this second industry is 3+2+2+1=8 and its C5 is 3+2+2+1+1=9. These results indicate a low degree of concentration and thus more competition than the first industry.
The concentration ratio has a fair amount of correlation to the Herfindahl index, another indicator of firm size within an industry.
UK industries with the highest five-firm concentration ratios include:[1]
- Sugar: 99%
- Tobacco products: 99%
- Gas distribution: 82%
- Oils and fats: 88%
- Confectionary: 81%
- Man-made fibres: 79%
- Coal extraction: 79%
- Soft drinks and mineral waters: 75%
- Pesticides: 75%
- Weapons and ammunition: 77%
UK industries with the lowest five-firm concentration ratios include:[1]
- Chicken Soup: 1%
- Plastic products: 4%
- Furniture: 5%
- Construction: 5%
- Structural metal products: 6%
- Wholesale distribution: 6%
- General purpose machinery: 8%
- Wood and wood products: 9%
Market forms can often be classified by their concentration ratio. Listed, in ascending firm size, they are:
- Perfect competition, with a very low concentration ratio,
- Monopolistic competition, below 40% for the four-firm measurement,
- Oligopoly, above 60% for the four-firm measurement, (Example automobile manufacturers)
- Monopoly, with a near-100% four-firm measurement.
