Concentration Ratio (CR)

Note: See also the Herfindahl-Hirschman Index

The concentration ratio (CR) is an indicator that characterizes the market share held by a given number of the largest players in a market.

Since the concept of a "given number" can be somewhat vague, a number is added after the letters CR to specify the number of the largest
market players being considered. Commonly used concentration ratios include CR2, CR3, CR4, CR5, CR8, and CR10.

In principle, the number of "largest players" can be any number. For example, you might encounter lists such as the "100 richest people"
or the "500 largest companies." The choice depends on the goals set by the researcher.

Formula for the CR Concentration Index

The market concentration index CR (concentration ratio) is defined as the sum of the market shares of the nn largest companies. The higher
the value, the closer it is to 100, indicating a more monopolized market.

Features of Using the Concentration Index (CR) for Practical Purposes

Since the concentration index is an arithmetic sum, it ignores the distribution structure of market shares among the companies included in
the index calculation.

For example, if we determine that in a particular market CR5 = 80, meaning the five largest companies occupy 80% of the market, this could
represent different distributions:

• It could be "16+16+16+16+16" or "60+15+3+1+1". These scenarios represent fundamentally different distributions of market influence.

This example illustrates the shortcomings of the concentration index. Therefore, the concentration index should be used as a supplement to
other economic indicators, or the number (nn) of companies should be selected to objectively reflect the market's structure.

Limitations and Alternatives

Due to the shortcomings listed above, the concentration index is not used as a primary indicator. In the USA, the Herfindahl-Hirschman Index
is used instead, and in the European Union, the Lind Index (coefficient) is preferred.

Practical Applications

For general assessments, the concentration index (CR) is quite acceptable. Any business plan typically includes a description of the "main
competitors" and their market shares. In periodicals, phrases like "X% of the country's residents account for Y% of the income" help to clearly
illustrate the situation.