economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

, concentration ratios are used to quantify market concentration and are based on companies'

market share Market share is the percentage of the total revenue or sales in a Market (economics), market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those ...

s in a given industry. A concentration ratio (CR) is the sum of the percentage market shares of (a pre-specified number of) the largest firms in an industry. An ''n''-firm concentration ratio is a common measure of market structure and shows the combined market share of the ''n'' largest firms in the market. For example, if ''n'' = 5, ''CR''₅ defines the combined market share of the five largest firms in an industry.

Calculation

The concentration ratio is calculated as follows:

\text_n = C_1 + C_2 + \cdots + C_n = \sum\limits_^n C_i

where

C_i

defines the market share of the

i

th largest firm in an industry as a percentage of total industry market share, and

n

defines the number of firms included in the concentration ratio calculation. The

\text_4

and

\text_8

concentration ratios are commonly used. Concentration ratios show the extent of largest firms' market shares in a given industry. Specifically, a concentration ratio close to 0% denotes a low concentration industry, and a concentration ratio near 100% shows that an industry has high concentration.

Concentration levels

Concentration ratios range from 0%–100%. Concentration levels are explained as follows:

Benefits and shortfalls

Concentration ratios can readily be calculated from industry data, but they are a simplistic, single parameter statistic. They can be used to quantify market concentration in a given industry in a relevant and succinct manner, but do not capture all available information about the distribution of market shares. In particular, the definition of the concentration ratio does not use the market shares of all the firms in the industry and does not account for the distribution of firm size. Also, it does not provide much detail about competitiveness of an industry. The following example exposes the aforementioned shortfalls of the concentration ratio.

Example

The table below shows the market shares of the largest firms in two different industries (Industry A and Industry B). Aside from the tabulated market shares for Industry A and Industry B, both industries are the same in terms of the number of firms operating in the industry and their respective market shares. In this example, in both cases, all other firms have a share of less than 10%. It is evident from these figures that Industry B is more concentrated than Industry A, since the market share is distributed more heavily towards the more dominant firms. However, Industry A and Industry B both have ''CR''₄ ratios of 80%. This shows that the CR ratio does not fully take into account the distribution of market share amongst the most dominant firms.

Calculation

Concentration levels

Benefits and shortfalls

Example

References

See also