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.
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)