How to calculate four-firm concentration ratio

Written by carter mcbride
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How to calculate four-firm concentration ratio
Calculations (business image by peter Hires Images from Fotolia.com)

The Four Firm Concentration Ratio calculates the market share of the top four companies in a given industry. This calculation determines if an industry is a oligopoly, a monopoly or neither. An oligopoly is an industry where only a couple of firms dominate the entire industry. A monopoly is an industry dominated by one firm. A Four Firm Concentration Ratio below 40 per cent shows there is monopolistic competition. A Four Firm Concentration Ratio above 60 per cent shows there is an oligopoly.

Skill level:
Easy

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Instructions

  1. 1

    Determine the top four firms in an industry and determine the total sales in the industry. This information is found in places such as the Market Share Reporter, and trade journals.

  2. 2

    Find the top four companies' sales for the year in their annual report.

  3. 3

    Divide one firm's sales by total sales in the industry. Repeat for the other three firms.

  4. 4

    Add the four numbers calculated in Step 3. The sum of these four numbers is the concentration ratio of the four firms in the market. If the concentration ratio is below 40 per cent, the market is monopolistic. If the concentration ratio is about 60 per cent, there is an oligopoly. Between 40 and 60 per cent, the market is not dominated by a small set of firms.

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