Equity Investments - The Concentration Ratio and the Herfindahl Index

Concentration Ratio
The concentration ratio is the measure of the percentage market share in an industry held by the largest firms within that industry. For example, suppose 3 firms dominate a specific industry, such as beverages, holding 80% market share of the beverage industry. The concentration ratio of the beverage industry would thus be 80%.

Example: Concentration ratio
The beverage industry is composed of 5 firms with market shares as follows:

Co A has 30% market share
Co B has 30% market share
Co C has 20% market share
Co D has 15% market share
Co E has 5% market share.

Calculate the concentration ratio for the beverage industry.
Answer:
The three-firm concentration ratio fro the beverage industry is 80% (30% + 30% + 20%).

Herfindahl Index
Another measure of concentration in an industry can be expressed using the Herfindahl index. The Herfindahl index is simply the sum of the squares of the market shares for each firm within the industry and is always less than one.

Formula 13.12

Example: Calculate the Herfindahl Index
The beverage industry comprises 5 firms with market shares as follows:

Co A has 30% market share
Co B has 30% market share
Co C has 20% market share
Co D has 15% market share
Co E has 5% market share.

Calculate the Herfindahl Index for the beverage industry.

Answer:
The Hefindahl Index is calculated as follows:

(0.30)2 + (0.30)2 + (0.20)2 + (0.15)2 + (0.05)2 = 0.245

The Herfindahl index for the beverage industry is 0.245.

Considerations of Global Industry Competition


Related Articles
  1. Stock Analysis

    PepsiCo's Snacks Vs. Beverage Business: What's the Focus? (PEP)

    Find out if PepsiCo focuses more on its snack or beverage business, and learn about the financial contribution and growth outlook of each operating segment.
  2. Products and Investments

    Concentrated Funds: Here's What to Know

    Concentrated funds can help clients achieve returns with a smaller base of diversification than traditional funds. Here's what you should know about them.
  3. Stock Analysis

    Dr. Pepper Snapple’s Sales Challenge

    It’s difficult to see annual double-digit total returns for Dr. Pepper Snapple shareholders over the long term.
  4. Stock Analysis

    Emerging Market Consumers

    The growth prospects are strong for emerging market countries, which should boost the value of these stocks and ETFs.
  5. Stock Analysis

    ICICI Bank Limited and Other Big Movers In Financial on September 14, 2012

    The Nasdaq has climbed 1.1%, the S&P 500 has risen 0.6% and the Dow is up 0.4% on a good day for the market so far. The financial sector is the category of stocks containing firms that provide ...
  6. Stock Analysis

    Expedia and More Big Movers on the Nasdaq on September 21, 2012

    This morning, the Nasdaq has moved little, the S&P 500 has decreased 0.3% and the Dow has been relatively flat. The recent surge in popularity of technological stocks has launched the Nasdaq ...
  7. Investing News

    This Company's Dividend History Is The Real Thing

    Take water. Add some sugar, a little carbon dioxide and some flavoring. Sell at a gigantic markup. It sounds almost too simple to work, and yet Atlanta-based Coca-Cola Co. has remained a staple ...
  8. Stock Analysis

    Allergan and Other NYSE Stocks Making Big Moves

    After this morning's trading, the market is looking good. The Nasdaq has increased 0.1%; the S&P 500 is trading up 0.5%; and the Dow has climbed 0.4%. The NYSE is a stock exchange based in ...
  9. Sectors

    Consumer Staples Sector: Industries Snapshot (KO, PEP)

    Explore the six largest industries in the consumer staples sector. Learn about the competitive landscape, growth outlook and largest companies in each industry.
  10. Stock Analysis

    Consumer/Non-Cyclical Stocks, Including Coca-Cola FEMSA, S.A.B. de C.V, Making Big Moves on August 22, ...

    The market has been slipping so far today. The Nasdaq is down 0.2%; the S&P 500 has declined 0.4%; and the Dow has decreased 0.5%. The Consumer/Non-Cyclical sector (XLP) is currently lagging ...
RELATED TERMS
  1. Concentration Ratio

    In economics, a ratio that indicates the relative size of firms ...
  2. Concentration Account

    A deposit account used to aggregate funds from several locations ...
  3. Market Share

    The percentage of an industry or market's total sales that is ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  5. Activity Ratios

    Accounting ratios that measure a firm's ability to convert different ...
  6. Accounting Ratio

    A way of expressing the relationship between one accounting result ...
RELATED FAQS
  1. What is the historic average annual return of the food and beverage sector?

    Examine the current state of the food and beverage sector, along with learning the historical average annual returns for ... Read Answer >>
  2. What is the average debt/equity ratio for the food and beverage sector?

    Find out more about the categories in the food and beverage sector and the average long-term debt-to-equity ratio for the ... Read Answer >>
  3. What is the average price-to-earnings ratio in the food and beverage sector?

    Learn what the average price-to-earnings ratio is in the food and beverage sector and why other measures such as median should ... Read Answer >>
  4. What countries are driving most of the growth of the food and beverage sector?

    Learn about the countries, primarily emerging market nations, that are currently driving most of the growth in the food and ... Read Answer >>
  5. How much of the global beverage industry is controlled by Coca Cola and Pepsi?

    Examine the global nonalcoholic beverage industry, and learn what percentage of the market is controlled by the two major ... Read Answer >>
  6. How can I hedge my portfolio to protect from a decline in the food and beverage sector?

    Learn why countercyclical investments, such as precious metals, serve as the best hedge against exposure to the food and ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center