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. Investing

    How Much Coca-Cola Spends on Advertising

    Learn about Coca-Cola's ad spending and why the company has decided to spend the amount of money it does. Understand comparable companies and industries.
  2. Investing

    Comparing Coca-Cola and Pepsi's Business Models

    Understand more about the Coca-Cola company and the PepsiCo company. Learn about the key similarities and differences that make both companies successful.
  3. Investing

    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.
  4. Insights

    Coca-Cola “Future-Proofing” Its Brands (KO, PEP)

    The beverage maker is positioning itself for future consumer trends, but it’s not alone.
  5. Investing

    Coca-Cola's 3 Key Financial Ratios (KO)

    Get insight into why some of Coca-Cola's financial ratios are not as good as those of its peers, especially PepsiCo's, and explore how it may do better.
  6. Investing

    SXC Health Solutions Corp. (USA) Among the Nasdaq's Biggest Movers

    The market is having a bad day so far: the Nasdaq is trading down 0.3%; the S&P 500 has declined 0.4%; and the Dow has slipped 0.5%. The Nasdaq Composite Index is a capitalization-weighted index, ...
  7. Investing

    Useful Balance Sheet Metrics

    These metrics can help you better understand the information found on balance sheets.
  8. Investing

    The Price To Earnings Ratio Explained

    The price to earnings ratio is one of the most important ratios in investing. Find out how it is calculated, how it can be used and what it tells investors about a particular stock.
  9. Investing

    Biggest Financial Sector Movers for July 24, 2012, Including NSM

    This morning's trading has marked a bad day for the market so far. The Nasdaq has declined 0.2%; the S&P 500 is trading down 0.5%; and the Dow has fallen 0.6%. The financial sector is the category ...
  10. Investing

    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 ...
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center