What is a Four-Firm Concentration Ratio?
The four-firm concentration ratio (also known as the CR4 or 4-firm concentration ratio) is a measure of the market share of the four largest firms in a given industry. It is calculated by adding together the market share of the four largest firms in the industry and dividing it by the total market size. The resulting ratio gives an indication of the level of competition in the industry.
Understanding the Four-Firm Concentration Ratio
The four-firm concentration ratio is used to measure the level of concentration in an industry. A high concentration ratio suggests that the market is dominated by a few firms, while a low concentration ratio suggests that the market is more competitive. This can be helpful for businesses looking to enter a particular market, as it can give an indication of how difficult it may be to compete.
Calculating and Interpreting the Four-Firm Concentration Ratio
The four-firm concentration ratio is calculated by adding together the market share of the four largest firms in the industry and dividing it by the total market size. For example, if the four largest firms each have a market share of 25%, the four-firm concentration ratio would be equal to 100% (25% + 25% + 25% + 25% = 100%). This suggests that the four firms have a strong presence in the market and the industry is highly concentrated.
Examples of the Four-Firm Concentration Ratio
The four-firm concentration ratio can be used to compare different industries and assess the level of competition in each. For example, the four-firm concentration ratio for the U.S. airline industry is 87%, suggesting that the industry is highly concentrated. In contrast, the four-firm concentration ratio for the U.S. banking industry is only 38%, suggesting that the industry is more competitive.
Conclusion
The four-firm concentration ratio is a useful tool for measuring the level of concentration in an industry. It can help businesses assess how competitive a given market is and make informed decisions about entering that market.