What is the four-firm concentration ratio?

The Four-Firm Concentration Ratio

The four-firm concentration ratio is a measure of market competition that calculates the total market share of the four largest firms in an industry. In this case, firms A, B, C, and D account for a total of 31% of the industry's sales. The correct option in this scenario is b. 0.31.

Explanation

The four-firm concentration ratio provides insight into the level of competition within an industry. By adding the market shares of the four largest firms, analysts can determine the extent of market control these firms possess.

In the example given, firms A, B, C, and D have sales values of $5 million, $3.2 million, $0.8 million, and $0.4 million, respectively. Considering the total industry sales of $30 million, the calculation for the four-firm concentration ratio is: ($5M + $3.2M + $0.8M + $0.4M) / $30M = 0.31.

Therefore, a four-firm concentration ratio of 0.31 suggests that the top four firms hold a 31% market share. Higher ratios indicate a more concentrated market with less competition among firms.