Sunday, 16 January 2011

Measure of Market Concentration: Concentration Ratio

What is a concentration ratio?

A concentration ratio is a percentage which shows the percentage of output/sales of a group of firms in an industry. We usually show this b stating whether it is the top 2, 3, 5 etc. firms e.g. the 3-firm market concentration for the grocery market is 64.7% in 2008. 

Why is this important?

From this measurement we can induce what market structure a particular industry belongs to. For example if a few firms dominate the market (oligopoly) the concentration ratio for the top x-firms will be high whereas if no firms dominate the market (perfect competition) then the concentration ratio for the same number of firms will be significantly lower. 

In an exam, as far as my knowledge goes you can be asked to calculate it, verify it or use it to suggest what market structure an industry belongs to.

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