Question

6. The chief operating officer of your company comes to you one morning with the following information about firms in your industry:

                        Firm                                        Annual Sales (in millions of dollars)

            ===============================================

                        A                                             $2,000

                        B                                             1,800

                        C                                             1,200

                        D                                             1,000

                        E                                                   500

                        F                                                   200

                        G                                                  100

                        All other firms            combined                    $   15,500 million

            The COO asks you to calculate the industry’s four-firm concentration ratio to discover whether or not the industry is competitive or concentrated. Calculate and show.

Answer 1

Four firm concentration ratio is the percentage of industry slaes that comes from the four largest firms (in terms of sales)

Firms	Annual Sales (Millions of $)
A	2000
B	1800
C	1200
D	1000
E	500
F	200
G	100
All other firms	15500
Total sales	22300

Industry sales (total sales) = $22300 millions

Firm A, B, C and D are four largest firms

Four-firm concentration ratio = (Sales of Firm A + Sales of Firm B + Sales of Firm C + Sales of Firm D) / Industry sales

=>Four-firm concentration ratio = ($2000 million + $1800 million + $1200 million + $1000 million) / $22300 million

=> Four-firm concentration ratio = $6000 millions / $22300 millions

=> Four-firm concentration ratio = 0.2690

=> Four-firm concentration ratio = 26.90%

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Concentraion ratio ranges from a 0% (i.e., low) to 100% (i.e., high)

If concentration ratio is 0%, then market is extremely competitive

If concentration ratio is 100%. then market is extremely concentrated.

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High concentration level, if concentration ratio lies between 80% to 100%

Medium concentration level, if concentration ratio lies between 50% to 80%

Low concentration level, if concentration ratio lies between 0% to 50%

Our four-firm concentration ratio is 26.90%

Hence, market is more competitive