Concentration ratio
Definition
Concentration ratio: the combined market share of the largest few firms in a market, expressed as a % of total market sales.
n-firm concentration ratio: the sum of the market shares of the largest n firms, such as the top 3, 4 or 5.
- Market share is usually measured by sales revenue, though output or employment can also be used.
- The higher the ratio, the bigger the share of the market controlled by its largest firms.
n-firm concentration ratio
CRn=sales of largest n firmstotal market sales×100% CR_n = \dfrac{\text{sales of largest } n \text{ firms}}{\text{total market sales}} \times 100\% CRn=total market salessales of largest n firms×100%Key Idea
- A high ratio indicates a concentrated market dominated by a few firms.
- A low ratio indicates a competitive market shared among many firms.
Calculating the ratio
- Decide how many leading firms to include, such as the top 3, 4 or 5.
- Find each firm's market share as a % of total market sales.
- Add those shares together to obtain the n-firm concentration ratio.
- State the result as a single % figure.
Worked example
Example
- In a grocery market with total sales of £500m a year, the four largest chains sell £150m, £125m, £75m and £50m.
- The top four together sell £400m of the £500m market, so CR4 = 80%.
- Because four firms supply four-fifths of the market, this is a tight oligopoly.
- Adding a fifth chain selling £20m, the top five sell £420m of the £500m market.
- So the five-firm ratio is 84%.
What it shows
- The ratio locates a market on the spectrum between perfect competition and monopoly.
- A ratio near 100% points to a monopoly or a tight oligopoly.
- A ratio near 0% points to a fragmented, highly competitive market.
- As a rule of thumb, a five-firm ratio above about 60% suggests an oligopoly.
Note
- The higher the ratio, the fewer firms dominate the market.
- The ratio helps compare the degree of competition across different markets.
Limitations
- The ratio shows market structure but not how the firms actually behave.
- A concentrated market may still be competitive if it is contestable.
- The ratio ignores the size distribution among the leading firms.
- It can overstate dominance by excluding foreign competition and imports.
Note
- A high ratio is not proof of collusion or of consumer harm.
Exam technique
- Add the leading firms' shares, then state what the figure implies about market structure.
- Always interpret the number, linking a high ratio to possible market power.
Common Mistake
- Do not treat a high concentration ratio as proof of collusion.
- Remember the ratio measures structure, not the conduct of firms.
Self review
- Define the n-firm concentration ratio.
- Calculate the four-firm ratio for shares of 30%, 25%, 15% and 10%.
- What does a ratio near 100% suggest about market structure?
- Give one limitation of the concentration ratio.
