Market concentration
Market concentration measures the extent to which a market is dominated by a small number of firms.
How competitive a market is depends a great deal on how few firms dominate it. Market concentration is the measure of that domination.
Market concentration measures the extent to which a market is dominated by a small number of firms, the degree to which output, sales, or capacity is concentrated in the largest few. It is a key indicator of market structure and competitive intensity, and a central input to competition policy.
From fragmented to concentrated
Markets vary enormously in concentration, from highly fragmented, with many small firms none of which holds much share, to highly concentrated, where a handful of firms control most of the market. Concentration matters because it shapes behaviour: a fragmented market tends toward competition, since no firm has the power or the ability to coordinate, while a concentrated one is more prone to market power, tacit collusion, and the muting of competition. Measuring concentration is thus a first step in judging how a market is likely to behave.
How it is measured
Concentration is captured by various measures. The simplest are concentration ratios, the combined market share of the largest few firms, say the top three or four. More sophisticated is the Herfindahl-Hirschman Index, which sums the squared market shares of all firms, giving extra weight to the largest and so capturing both the number of firms and the inequality of their sizes. These measures translate the structure of a market into a number that regulators and analysts use to flag markets where competition may be weak.
Concentration and its meaning
High concentration is a warning sign rather than a verdict. It is associated with greater market power and a higher risk of collusion, and competition authorities scrutinise concentrated markets and block mergers that would raise concentration too far. But concentration alone does not prove harm: a concentrated market may still be fiercely competitive, or contestable through the threat of entry, while a fragmented one may be less competitive than it looks. Concentration measures structure, which influences but does not determine conduct and outcomes.
Market concentration is the standard gauge of how dominated a market is, and a primary tool for spotting where competition may be at risk. It is most useful as a starting point, flagging markets and mergers that warrant closer examination, rather than as a final answer, since the link from the structure it measures to the competition that ultimately matters is strong but not automatic.