Concentration ratio - Definition and Overview

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.

Some examples of the four-firm concentration ratio include:

• Traditional agriculture: Less than 5 percent
• Sheet metal: 9 percent
• Asphalt paving: 15 percent
• Typesetting: 16 percent
• Publishing: 23 percent
• Soap and detergents: 63 percent
• Men's slacks: 75 percent
• Aircraft: 79 percent
• Greeting cards: 84 percent
• Cigarettes: 93 percent

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 percent for the four-firm measurement,
• Oligopoly, above 40 percent for the four-firm measurement, (Example- Boeing and Airbus in jetliners)
• Monopoly, with a near-100 percent four-firm measurement. (Example- Microsoft in PC operating systems)

See also: Market form, Herfindahl index, Microeconomics, Market dominance strategies