Concentration ratio
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
A concentration ratio is the combined market share of the largest few firms in an industry. The most common one is CR4, the total share of the top four firms. A high ratio means a few firms control most of the market. A low ratio means output is spread across many sellers. It is simple to calculate, but it ignores how that share is split among the top firms.
Example
Four firms hold shares of 40%, 30%, 20% and 10%, so CR4 = 100%. A market where four firms hold 25% each also has CR4 = 100%. Yet the first market is dominated by one firm and the second is evenly balanced. CR4 cannot tell these two apart.
Don't confuse with
- Herfindahl-Hirschman Index (HHI): it squares the share of every firm and adds them up, so big firms count for more. The two markets above have the same CR4, but their HHIs are 3,000 and 2,500.
Related concepts
- Market structure
- Market power
- Barriers to entry
- Product differentiation
- Market concentration
- Herfindahl-Hirschman Index
- Price maker