Kno-how! on market concentration

The term concentration ratio measures the market share of the top ‘n’ firms in the industry. Share can be by sales, employment or any other relevant indicator. The value of ‘n’ is often five, but may be three or any other small number. If the top ‘n’ firms gain a greater market share the industry is said to have become more highly concentrated. Our example below is taken from the June 2008 figures for market share in the UK food retail sector.

• The 3 firm concentration ratio is measured at 63.9%

• The 5 firm concentration ratio is measured at 83.4%

• This market structure suggests an oligopoly – but each of the businesses has ‘market power’ in the sense that each has control over the products it sells and the prices it charges.

• The data is for the national economy – local and regional concentration ratios might be different – e.g. the local monopoly power enjoyed by one or more businesses. The UK competition authorities are aware of this when they investigate markets.


MARKET SHARE
(%)
CUMULATIVE MARKET SHARE
(%)
Tesco
31.2
31.2
Asda (Wal-Mart)
16.8
48.0
Sainsbury’s
15.9
63.9
Morrisons (Safeways)
11.4
75.3
Co-operative (Somerfield)
8.1
83.4
Waitrose
3.9
87.3
Aldi
2.9
90.2
Lidl
2.3
92.5
Iceland
1.7
94.2

1. A pure monopolist in an industry is a single seller. It is quite rare for a firm to have a pure monopoly – except when the industry is state-owned and has a legally protected monopoly. The Royal Mail used to have a statutory monopoly on delivering household mail. But this is now changing fast as the industry has been opened up to fresh competition.

2. A working monopoly: A working monopoly is any firm with greater than 25% of the industries' total sales. In practice, there are many markets where businesses enjoy some degree of monopoly power even if they do not have a twenty-five per cent market share.

3. A dominant firm is a firm that has at least forty per cent of their given market