How do we measure a four-firm concentration ratio? What does a high measure mean about the extent of competition?

Start by gathering data on the market shares of the top four firms in the industry. This information can generally be obtained through sources like company financial reports, industry research reports, or government economic data. Make a note of the market shares of these firms.

Once you have collected the market shares for the top four companies, add them together to calculate the four-firm concentration ratio. Mathematically, this can be expressed as: Four-firm concentration ratio = \(Market Share_1 + Market Share_2 + Market Share_3 + Market Share_4\) where \(Market Share_i\) represents the market share of the i-th largest firm.

The resulting four-firm concentration ratio can be used to understand the extent of competition within the industry. A high concentration ratio (e.g. 75% or more) indicates that the top four firms hold a significant majority of the market share, which suggests a lower level of competition and a greater likelihood of oligopolistic or monopolistic market structures. On the other hand, a low concentration ratio (e.g. 40% or less) indicates that the industry is more competitive, with a larger number of firms holding significant market shares. In conclusion, to measure a four-firm concentration ratio, first gather data on the market shares of the top four firms in the industry. Then, add up their market shares to calculate the concentration ratio, and interpret the result to assess the level of competition within the market.