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Concentration ratio

In economics, the concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry.

The concentration ratio has a fair amount of correlation to the Herfindahl index, another indicator of firm size.

Some examples of the four-firm concentration ratio include:

  • Traditional agriculture: Less than 5 percent
  • Sheet metal: 9 percent
  • Asphalt paving: 15 percent
  • Typesetting: 16 percent
  • Publishing: 23 percent
  • Soap and detergents: 63 percent
  • Men's slacks: 75 percent
  • Aircraft: 79 percent
  • Greeting cards: 84 percent
  • Cigarettes: 93 percent

Market forms can often be classified by their concentration ratio. Listed, in ascending firm size, they are:

See also: Market form, Herfindahl index, Microeconomics

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