"TOTAL INDUSTRY SALES ARE $105 MILLION.THE TOP FOUR FIRMS ACCOUNT FOR SALES OF $10 MILLION,$9 MILLION,$8 MILLION, AND $5 MILLION, RESPECTIVELY".
WHAT IS THE FOUR FIRM CONCENTRATION RATIO FOR THIS EXAMPLE?
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Concentration ratio in economics is a measure of market power of dominant firms in a monopolistic or oligopolistic market. Concentration ratio or, more specifically, four-firm concentration ratio is the percent of total industry turnover accounted by the largest four firms in the industry. The concentration ration could be calculated for some other number of firs also. For example we can calculate eight-firm concentration ratio also. In a monopoly market there will be only one firm with concentration ratio of 100 percent.
In the question above, information is provided on turnover of four firms therefore we will calculate four-firm concentration ratio.
The total turnover of the four top firms is $32 million (10+9+8+5 = 32).
The total turnover of the industry is $105 million.
The turnover of the four top firms as percentage of industry turnover:
= (32/105) x 100 = 30.4762 %
Therefore four-firm concentration ratio for the given example is 30.4762 %.
Please note that a four firm concentration ration is considered to be at lower side of medium. Thus the market will qualify more as a fairly competitive market, rather than as a monopolistic market. At the most the market may be considered a oligopolistic market.
What you have to do to figure this out is to add the sales of the four firms and divide that figure by the total for the whole industry.
The four firm concentration ratio is a figure that is often used (along with eight firm concentration ratios) to determine the extent to which a particular market is oligopolistic.
So, in your example, the four firms have sales of $32 million combined out of the total industry figure of $105 million. This yields a ratio of roughly 30.5%. Such a concentration ratio is quite low, which means this market is probably in monopolistic competition rather than oligopoly.
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