What does the concentration ratio indicate?

The concentration ratio is a key economic indicator that measures the extent to which a small number of firms dominate an industry. Specifically, it reflects the percentage of total industry sales that is accounted for by the top firms within that industry.

By focusing on the share of sales that the leading companies possess, the concentration ratio provides insights into the level of competition present in the market. A high concentration ratio suggests that a few firms have significant market power, potentially leading to less competition and higher prices for consumers. Conversely, a low concentration ratio indicates a more competitive market with many firms having relatively equal shares.

Understanding the concentration ratio is essential for analyzing market structures and the competitive landscape of industries, which can have important implications for strategic decision-making in business and regulatory policies.