Figure 11-1 Concentration Ratios in Selected Canadian
Manufacturing Industries
An industry with a small number of relatively large firms is said to be
highly concentrated. A formal measure of such industrial concentration is
given by the concentration ratio.
Concentration Ratios
When we measure whether an industry has power concentrated in the
hands of only a few firms or dispersed over many, it is not sufficient to
count the firms. For example, an industry with one enormous firm and 29
very small ones is more concentrated in any meaningful sense than an
industry with only five equal-sized firms. One approach to this problem is
to calculate what is called a concentration ratio , which shows the
fraction of total market sales controlled by the largest sellers, often taken
as the largest four or eight firms.
Figure 11-1 shows the four-firm concentration ratios in several
Canadian manufacturing industries. As is clear, the degree of
concentration is quite varied across these industries. In the petroleum
industry, for example, the largest four firms account for about 65 percent
of total sales. At the other extreme, the largest four firms in the fabricated
metals industry account for less than 10 percent of sales. These firms may
be large in some absolute sense, but the low concentration ratios suggest
that they have quite limited market power.