Concentration ratio

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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. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry.

The concentration ratio has a fair amount of correlation to the Herfindahl index, another indicator of firm size.

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:^[2]

• Metal forging, pressing etc.: 4%
• 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 40% for the four-firm measurement, (Example automobile manufacturers)
• Monopoly, with a near-100% four-firm measurement.

Notes

References

See also

• Market form
• Herfindahl index
• Microeconomics
• Market dominance strategiesde:Konzentrationsrate