Question

How do we measure a four-firm concentration ratio? What does a high measure mean about the extent of competition?

Short answer

To measure a four-firm concentration ratio, identify the market shares of the top four firms in the industry and add them together using the formula: Four-firm concentration ratio = \(Market Share_1 + Market Share_2 + Market Share_3 + Market Share_4\). A high measure, such as 75% or more, suggests lower competition and a possible oligopolistic or monopolistic market structure, while a low measure (e.g., 40% or less) indicates higher competition with more firms holding significant market shares.

Step-by-step solution

Identify the market shares of the top four firms

Start by gathering data on the market shares of the top four firms in the industry. This information can generally be obtained through sources like company financial reports, industry research reports, or government economic data. Make a note of the market shares of these firms.

Add up the market shares of the top four firms

Once you have collected the market shares for the top four companies, add them together to calculate the four-firm concentration ratio. Mathematically, this can be expressed as: Four-firm concentration ratio = \(Market Share_1 + Market Share_2 + Market Share_3 + Market Share_4\) where \(Market Share_i\) represents the market share of the i-th largest firm.

Interpret the concentration ratio to determine the level of competition

The resulting four-firm concentration ratio can be used to understand the extent of competition within the industry. A high concentration ratio (e.g. 75% or more) indicates that the top four firms hold a significant majority of the market share, which suggests a lower level of competition and a greater likelihood of oligopolistic or monopolistic market structures. On the other hand, a low concentration ratio (e.g. 40% or less) indicates that the industry is more competitive, with a larger number of firms holding significant market shares. In conclusion, to measure a four-firm concentration ratio, first gather data on the market shares of the top four firms in the industry. Then, add up their market shares to calculate the concentration ratio, and interpret the result to assess the level of competition within the market.