Identification of Market Structure – Concentration Ratio

Concentration ratio:

the sum of the market shares of the largest N firms.

Advantage: simple to compute.

Disadvantage: does not directly quantify market power; unaffected by mergers among the top market incumbents.

[Practice Problems] An analyst gathers the following market share data for an industry:

The industry’s four-company concentration ratio is closest to:

[Solutions] B

The top four companies in the industry comprise 86% of industry sales:

(300 + 250 + 200 + 150)/(300 + 250 + 200 + 150 + 100 + 50) = 900/1050 = 86%.