Market concentration gives an idea of the distribution of producers in the market. It also gives a measure of the amount of competition in the industry, and this, in turn helps in the calculation of profits.
The four-firm concentration ratio is one of the methods for evaluating the concentration. The percentage of the industry’s output sold by the four biggest companies can be calculated using this method. This is also known as the Herfindahl-Hirschman Index, or simply Herfindahl Index, which helps determine the dominance of one or a select few firms operating in the market. This approach does not leave out the market share of the remaining firms in the market. If the top four firms control an overwhelming majority of the market, the market is said to be highly concentrated, but if their share is half or less of the whole market pie, then the market is said to be less concentrated.
Market concentration is closely watched by the Government and the business community. In order to ensure sufficient market concentration, there are several antitrust laws that improve market efficiency by encouraging competition and discouraging unfair trade practices. This is achieved by lowering the barriers to entry, opening up monopolies, and penalising cartelisation.
Healthy competition is necessary for the customers to have good choice and for the spending of their purchase power. Greater consumer spending helps in the growth of the economy, creation of jobs and increase in the overall standard of living of the nation.
In the latter part of the 20th century, when the telecommunications industry in the United States was deregulated, it now became possible for smaller firms to offer the same range and quality of services that were once primarily offered by AT&T. AT&T remained the market leader but now, consumers had more choice in their selection of a network provider.