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Using the Four Firm Concentration Ratio to Determine Market Structure

Here is one more milestone three tip that I’d like to share in order to help you determine the market structure of your industry. Perfect Competition and Monopoly markets are very rare, so it is most likely that your firm operates in a monopolistically competitive industry or in an oligopolistic industry. How do you figure out which market fits your firm’s industry? A great way to do this is by utilizing the four firm concentration ratio.

Suppose that the distribution of sales in an industry is as shown in the chart below (market share). You should have already found the market share data for your industry in a previous critical element, but if you are working out of order or skipped over that element, here are some tips on how to find the market share for your industry.

concentration ratio sample problem

What is the four-firm concentration ratio for this industry?

To find this, we add up the market share percentage for the top 4 firms.

Four firm concentration ratio = 20% + 18% + 12% + 10% = 60%

If the top four firms make up 40% or more of the market share, this is an indicator of an oligopoly. 40 – 60% that is a bit of a gray area, and when deciding between monopolistic competition and oligopoly you’ll want to focus on whether the barriers to entry are low to medium (monopolistic competition) or high (oligopoly). If the four firm concentration ratio is greater than 60%, you can be pretty certain that you are looking at an industry with an oligopoly market structure.

This flow chart may help you determine the market structure of the industry your firm operates in.

Mkt Structure Flow Chart

For more examples and tips on writing the Overall Market section of your final paper:

Determining Market Structure for Milestone 3

How to Write an Exemplary “Overall Market” section (sample paper included)

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