Concentration Ratio Definition

A concentration ratio is a measure of the degree to which an industry or sector is concentrated within a particular economy. It is calculated by dividing the market share of the largest firms in an industry or sector by the total market share of all firms in that industry or sector.

The concentration ratio can be used to assess the level of competition within an industry or sector. A high concentration ratio indicates that the industry or sector is dominated by a few large firms, while a low concentration ratio indicates that the industry or sector is more fragmented and competitive.

There are several different types of concentration ratios, including the Herfindahl-Hirschman Index (HHI), the four-firm concentration ratio, and the eight-firm concentration ratio. The HHI is considered to be the most comprehensive measure of industry Concentration.

The four-firm concentration ratio measures the market share of the four largest firms in an industry or sector. The eight-firm concentration ratio measures the market share of the eight largest firms in an industry or sector.

Concentration ratios can be useful for assessing competition within an economy, but it is important to remember that they do not provide a complete picture. Other factors, such as barriers to entry and exit, may also affect competition levels within an industry or sector.