Measures of Market Concentration

Measures of Market Concentration

Market concentration describes the extent to which the top firms in an

industry, say in the car industry where the top five firms in the UK

would account for nearly 90% of the market, take up a large portion of

the market share. There are various methods used to measure this,

which will be discussed in turn.

‘The concentration ratio is the percentage of all sales contributed by

the leading three or five, say, firms in a market.’ (Maunder, P. et al

(1991) p561) So the concentration ratio can be calculated by using the

cumulative share of the first three or five firms according to their

sales revenue share, summarised in the following equation:

CRk= SSi , i=1…k

where Si =sales revenue of ith firm/sales revenue of subsector

Looking at the following table we can see that between the largest

five firms in each of the following markets there has been a

significant increase in their market concentration from 1963 to 1977:

Product

1963/ %

1977/ %

Beer

50.5

62.2

Biscuits

65.5

79.7

Cars

91.2

98.4

Flour

51

85.7

Pharmaceuticals

53.9

63.2

Refrigerators

71.9

98.8

Washing Machines

85.2

96.2

(Griffiths, A. & Wall, S. (1991) p 109)

So as can be seen from the above figures in 1977 especially the car,

refrigerators and washing machines industries had high market

concentrations. However high market concentrations are not present in

all industries, and much variance can occur. For example in the

tobacco industry the five largest firms accounted for 99% output and

98% of employment in 1991, however at the same time in the leather

goods industry the five largest firms accounted for only 10% of net

output and employment in.

However is there a way of classifying certain industries as being

oligopolistic when looking at the three or five firm concentration