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.
