Question

How do we measure a four-firm concentration

ratio? What does a high measure mean about the extent of competition?

Short answer

The concentration of the four largest dominant firms in the industry.

Step-by-step solution

Step1. Concept 

Monopoly power in any market can be measured by various methods. These include four-firm concentration ratio, Hirschman Herfindahl Index, etc.

Step2. Explanation, Calculation and Implication 

Four firm concentration ratio is simply the addition of the concentration of the largest four, dominant firms in the industry.

For eg. there are only 6 firms in an industry with the following mentioned concentration:

A- 60%

B- 12%

C- 10%

D- 8%

E- 7%

F- 3%

The four firm concentration ratio is simply the addition of the concentration of firms A, B, C and D; i.e. 0.9 in our example (90%).

Higher the ratio, higher is the monopoly power and lesser is the competition.