Concentration ratio
In economics, a concentration ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR4 and the CR8, which means the market share of the four and the eight largest firms. Concentration ratios are usually used to show the extent of market control of the largest firms in the industry and to illustrate the degree to which an industry is oligopolistic.
The standard tools of competition economists and competition authorities to measure market concentration are the Herfindahl index (HHI) and the concentration ratios (CR(n)). These two are known as the traditional structural measures of market concentration (based on market shares). The concentration of firms in an industry is of interest to economists, business strategists and government agencies.
Usually, these two common ratios are comparable from industry to industry, while concentration ratios for other numbers of firms can be also calculated.
N-firm concentration ratio is a common measure of market structure and shows the combined market share of the N largest firms in the market. For example, the 5-firm concentration ratio in the UK pesticide industry is 0.75, which indicates that the combined market share of the five largest pesticide sellers in the UK is about 75%. N-firm concentration ratio does not reflect changes in the size of the largest firms. The Herfindahl index avoids this problem.
Concentration ratios range from 0 to 100 percent. The levels reach from no, low or medium to high to "total" concentration.
The definition of the concentration ratio does not use the market shares of all the firms in the industry and does not provide the distribution of firm size. It also does not provide a lot of detail about competitiveness of the industry. The concentration ratios just provide a sign of the oligopolistic nature of an industry and indicate the degree of competition. The Herfindahl index provides a more complete picture of industry concentration than does the concentration ratio.
UK industries with the highest five-firm concentration ratios (CR5) include the following:
UK industries with the lowest five-firm concentration ratios include the following:
As to account for the specificities of electricity markets the specific structural measures are calculated. The Herfindahl index and the concentration ratios focus on the market shares of companies, but these measures identify the "pivotalness" of companies to meeting the demand on the system. A company that is very pivotal can be said to have a high market power.
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