In Economics, the concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry. In general, the N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry.
The concentration ratio has a fair amount of correlation to the Herfindahl index, another indicator of firm size.
Some examples of the four-firm concentration ratio include:[citation needed]
Traditional agriculture: Less than 5%
Sheet metal: 9%
Asphalt paving: 15%
Typesetting: 16%
Publishing: 23%
Soap and detergents: 63%
Men's slacks: 75%
Aircraft: 79%
Greeting cards: 84%
Cigarettes: 99%
Market forms can often be classified by their concentration ratio. Listed, in ascending firm size, they are:
Perfect competition, with a very low concentration ratio,
Monopolistic competition, below 40% for the four-firm measurement,
Oligopoly, above 40% for the four-firm measurement, (Example automobile manufacturers)
Monopoly, with a near-100% four-firm measurement.
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