Add together the total sales for each of the four largest firms in your selected industry. Then divide that sum by the total sales of the industry. Convert that result to a percentage, and that percentage value is the four-firm concentration ratio.

What does a high concentration ratio indicate?

A high concentration ratio indicates that a few firms produce most of the industry output and may indicate a significant amount of market power in the industry. 2. High concentration ratios do not necessarily imply market power.

What is the four-firm concentration ratio formula?

The four-firm concentration ratio is calculated by adding the market shares of the four largest firms: in this case, 16 + 10 + 8 + 6 = 40. This concentration ratio would not be considered especially high, because the largest four firms have less than half the market.

Why is high market concentration bad?

Increasing concentration can be a good or a bad sign for the health of a competitive market. If it is good, then concentration should be associated with lower prices and higher productivity. If bad, concentration would be associated with higher prices and lower productivity.

What is meant by a highly concentrated market?

Definition: Market concentration is used when smaller firms account for large percentage of the total market. The value of top firms or top ‘n’ firms may be three or maximum five. If the top firms keep on gaining market share, then we say that the industry has become highly concentrated.

Is the pharmaceutical industry highly concentrated?

A study of the sector by Torreya Partners stated that “it is readily apparent that the generic pharmaceutical segment is not highly concentrated,” but they defined the industry at the global level, looking at revenue of companies that sell generic drugs and calculated the HHI to be 210 (Lefkowitz 2016).

How concentrated is the pharmaceutical industry?

The pharmaceutical industry amassed $174.1 billion revenue with $39.2 billion in profits (Oliver, 2017) with an annual growth rate of 3.6% between 2012 to 2017 (Oliver, 2017). The loss of patent exclusivity allowed competition with generic pharmaceutical manufacturers (Oliver, 2017).

What are the two measures of concentration?

Competition economists and competition authorities typically employ concentration ratios (CRn) and the Herfindahl-Hirschman Index (HHI) as measures of market concentration.