What is a Concentration Ratio?
A concentration ratio is a way to measure market concentration, which is a measure of the extent to which a particular market’s output is controlled by a limited number of firms. It is a way to quantify the level of competition in an industry. The concentration ratio is calculated by dividing the market share of the largest firms in the industry by the total market share of all firms in the industry.
How is the Concentration Ratio Calculated?
The concentration ratio is calculated by taking the market share of the largest firms in the industry and dividing it by the total market share of all firms in the industry. The concentration ratio is usually expressed as a percentage. For example, if the top four firms in an industry have a market share of 80%, then the concentration ratio would be 80%.
Concentration Ratio Examples
Here are some examples of industries with high and low concentration ratios:
- High Concentration Ratio: The US airline industry has a concentration ratio of 80%. The top four firms (American Airlines, Delta Airlines, Southwest Airlines, and United Airlines) account for 80% of the market.
- Low Concentration Ratio: The US retail industry has a concentration ratio of 20%. The top four firms (Walmart, Amazon, Costco, and Kroger) account for only 20% of the market.
Conclusion
The concentration ratio is a useful measure of the level of competition in an industry. It can be used to determine how concentrated a particular industry is and whether the industry is highly competitive or not. For more information on the concentration ratio, please see the following resources: