Concentration Ratio

The concentration ratio measures the combined market share of a leading cluster of businesses in a clearly defined market.

In the case of retail grocery in the UK for April 2016, the top five firms had 78% of the market and the leading eight firms took 93% of the total value of sales. 

Problem: Suppose that the 6 firms in an industry have total annual sales of $70, $40, $30, $30, $20, and $10 (in billions).

What is the four-firm concentration ratio in this industry?

The four-firm concentration ratio is the ratio of the sales of the four largest firms in the industry relative to total industry sales, expressed as a percentage. In this industry, the four-firm concentration ratio is then 170/200 = .85, or 85%.

Concentration ratios in United Kingdom

UK industries with the highest five-firm concentration ratios (CR5) include the following:
• Sugar: 99%
• Tobacco products: 99%
• Gas distribution: 82%
• Oils and fats: 88%
• Confectionery: 81%
• Man-made fibres: 79%
• Coal extraction: 79%
• Soft drinks and mineral waters: 75%
• Pesticides: 75%
• Weapons and ammunition: 77%
UK industries with the lowest five-firm concentration ratios include the following:[6]
• Metal forging, pressing etc.: 4%
• Plastic products: 4%
• Furniture: 5%
• Construction: 5%
• Structural metal products: 6%
• Wholesale distributions: 6%
• General purpose machinery: 8%
• Wood and wood products: 9%

Concentration levels

Concentration ratios range from 0 – 100%.
No concentration – 0% means perfect competition or at the very least monopolistic competition. If for example CR₄ = 0%, the 4 largest firm in the industry would not have any significant market share.
Low concentration – 0% to 40% This category ranges from perfect competition to an oligopoly.
Medium concentration – 40% to 70%An industry in this range is likely an oligopoly.
High concentration – 70% to 100%This category ranges from an oligopoly to monopoly.
Total concentration – 100% means an extremely concentrated oligopoly. If for example CR1= 100%, there is a monopoly.