The concentration ratio measures the level of market concentration. It shows the share of total industry production controlled by the largest companies.
How it is calculated:
- CRn: The total market share of the n largest firms.
- Commonly used measures include CR4 (top 4 firms) and CR8 (top 8 firms).
- Results are expressed as a percentage.
Interpreting the CR4 ratio:
- Above 50%: Highly concentrated (suggests an oligopoly or monopoly).
- 25% to 50%: Moderately concentrated.
- Below 25%: Highly competitive market.
- 100%: A total monopoly.
Why it is used:
- To measure the market power of leading companies.
- To help regulators identify potential monopolies.
- To understand the overall market structure.
Limitations:
- It does not measure real-world competition between companies.
- It often ignores international competition.
- Deciding what counts as a “market” can be unclear.
- It does not measure how easy it is for new companies to enter the market.