7.6.5—Concentration ratio

An n-firm concentration ratio is the combined market share of the largest n firms, usually expressed as a percentage. A high ratio suggests a concentrated market, while a low ratio suggests many smaller firms.

Choose the market definition, measure and number of firms carefully. Concentration can signal market power, but it does not prove abuse: products may be contestable, firms may compete strongly, or the market may be defined too narrowly or broadly.

If the four largest firms have shares of 35%, 25%, 15% and 10%, the four-firm concentration ratio is 85%.

A concentration ratio is not a direct price or profit measure, and it can hide inequality among the smaller firms or changes in potential competition.