A concentration ratio (CR) is the sum of the percentage market shares of (a pre-specified number of) the largest firms in an industry.
For example, if n = 5, CR5 defines the combined market share of the five largest firms in an industry.
Competition economists and competition authorities typically employ concentration ratios (CRn) and the Herfindahl-Hirschman Index (HHI) as measures of market concentration.
[citation needed] The concentration ratio is calculated as follows: [1]
defines the number of firms included in the concentration ratio calculation.
Concentration ratios show the extent of largest firms' market shares in a given industry.
Concentration levels are explained as follows: [2] Concentration ratios can readily be calculated from industry data, but they are a simplistic, single parameter statistic.
They can be used to quantify market concentration in a given industry in a relevant and succinct manner, but do not capture all available information about the distribution of market shares.
[1] The following example exposes the aforementioned shortfalls of the concentration ratio.
This shows that the CR ratio does not fully take into account the distribution of market share amongst the most dominant firms.