Concentration Ratio

Posted in Marketing and Strategy Terms, Total Reads: 705
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Definition: Concentration Ratio

Concentration ratio is the percentage of market share captured by top few firms in the industry.


A four firm concentration ratio is CR4; an eight firm concentration ratio is CR8, and so on. CR4 means the ratio of the market share of 4 largest firms to that of the entire industry.


Calculating Concentration Ratio:

CR4 = (Revenue of first largest firm + Revenue of second largest firm+ Revenue of third largest firm + Revenue of fourth largest firm)/Total market revenue for the industry segment


High concentration ratio indicates that there are few bigger firms which are dominating the market. Conversely low concentration ratio indicates that there are large numbers of players in the market, with lesser control in the hands of bigger players.

Concentration Ratio (CR4)

Inference drawn

0%

Perfect Competition

0%-50%

Between Perfect Competition and Oligopoly

50%-80%

Oligopoly

80%-100%

Between Oligopoly to Monopoly

100%

Monopoly

 

Drawbacks:

• One major drawback of using concentration ratio is it underplays the role of foreign competitors. When foreign penetration is high in a particular sector, concentration ratio overstates the true level of concentration

• Second it is compiled for national data and as such ignores regional or local market power

• Third is that it does not consider complimentary or substitute industries which may affect the industry being considered

• Another flaw is that it assumes that size distribution among the top firms used in calculation is insignificant. It also assumes rest of the firm’s size, number and market shares are irrelevant as it does not use them in calculation.

 

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