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. Chart Advisor

    'Tis The Season For Food And Beverage Stocks

    The holidays tend to be a gift to investors in defensive consumer stocks. Here's a food and beverage sector ETF (and its top holdings) to consider
  2. Stock Analysis

    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.
  3. Chart Advisor

    Why Now is the Time for Food and Beverage Stocks

    As volatility rears its ugly head, it's natural to investigate stable sectors such as food and beverages. Here's an appropriately-named ETF to consider.
  4. Chart Advisor

    Food And Beverage Stocks That Are On The Rise

    We'll take a look at several food and beverage companies that could be worth a closer look heading into 2016.
  5. Stock Analysis

    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.
  6. Professionals

    Types of Markets & Concentration Measures

    Types of Markets & Concentration Measures. This section differentiaties the price taker from the price-searcher market.
  7. 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.
  8. Stock Analysis

    Looking to Invest in Coca-Cola? Here's What to Expect (KO, PEP)

    Learn about the Coca-Cola company as well as the industry in which it operates. Understand what its investors should expect of the company.
  9. Stock Analysis

    Why These Are the Top 3 Beverage Stocks of 2016

    These three beverage stocks offer the best potential in 2016.
  10. Mutual Funds & ETFs

    6 ETFs to Fight Your Recession Jitters

    Are you worried about a recession? If so, consider these 6 ETFs.
RELATED TERMS
  1. Concentration Ratio

    In economics, a ratio that indicates the relative size of firms ...
  2. Food Industry ETF

    An exchange-traded fund that invests in food and beverage companies, ...
  3. Concentration Bank

    A financial institution that is the primary bank of an organization, ...
  4. Market Share

    The percentage of an industry or market's total sales that is ...
  5. Concentration Account

    A deposit account used to aggregate funds from several locations ...
  6. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
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. How does the risk of investing in the food and beverage sector compare to the broader ...

    Find out why investing in the food and beverage sector is generally considered to be less risky than investments in the broader ... Read Answer >>
  4. How attractive is the food and beverage sector for a growth investor?

    Learn how the food and beverage sector's volatility makes it attractive to growth investors, and discover how these investors ... Read Answer >>
  5. What are the primary risks an investor should consider when investing in the food ...

    Understand some of the various risk factors investors should consider when seeking investment opportunities in the food and ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center