Concentration Ratios

Definition of Concentration Ratios

The percentage of market share taken up by the largest firms. It could be a 3 firm concentration ratio (market share of 3 biggest) or a 5 firm concentration ratio.

Concentration ratios are used to determine the market structure and competitiveness of the market. For example, an oligopoly is defined when there is a 5-firm concentration ratio of greater than 50%

Importance of concentration ratios

The degree of competition. If the five-firm concentration ratio rises from 40% to 60%, this is an indication of a fall in competitive pressures. It could lead to higher prices for consumers

Indicate monopoly power. In the UK, the legal definition of a monopoly is a firm with more than 25% market share. Any firm over this threshold has an important market position.

Regulatory oversight. If there is a three-firm concentration ratio of over 80%, then there is greater scope for collusion and abuse of monopoly power. In this kind of industries, the government may need to use a regulator to check monopoly power isn’t being abused. For example, the government has a regulator for railways, electricity and gas – where the market is dominated by a few small firms.

Concentration ratios and contestability

One feature of concentration ratios is that they do not indicate the level of contestability.  A contestable market has freedom of entry and exit. The threat of competition is sufficient to keep prices low – even if the concentration ratio is quite high.

Examples

Market share of UK petrol stations

market-share-petrol

  • In the UK retail petrol industry, there is five-firm concentration ratio of 66%
  • There is a three-firm concentration ratio of 44%
  • The growth of supermarkets selling petrol has made the market more competitive – especially because supermarkets are willing to sell petrol at a competitive pressure to attract customers to shop at the supermarket.

Search Engine market share

Source: Statcounter.com

 

Note: I have seen other measures which put Google on closer to 80% of market share. This is from Statcounter.com own aggregate statistics.

UK Supermarket industry

supermarket-market-share-uk

The five firm concentration ratio for the industry is 66% – a case of an oligopoly.

  1. Tesco – 23%
  2. Asda 13%
  3. Sainsbury’s 13%
  4. Morrisons 12%
  5. Co-op 5%
  6. Marks & Spencers – 5%
  7. Waitrose – 4%
  8. Iceland – 2%
  9. Lidl – 2%
  10. Somerfield – 2%
  11. Aidl – 1%
  12. internet – 3%
  13. Others – 14%

Related

This entry was posted in . Bookmark the permalink.