Financial Education

The N-firm concentration ratio is an intuitive measure of industry concentration. Industries with high (or low) levels of concentration have few (or many) competitors.

The N-firm concentration ratio is found simply by adding the market shares of the N largest firms in the industry. For example, in an industry with six competitors with respective market shares of 30%, 20%, 20%, 10%, 10% and 10% the three firm concentration ratio would be 30% + 20% + 20% = 70% and the 5-firm concentration ratio would be 90%.

The N-firm concentration ratio is an intuitive measure, but the Herfindahl index provides a greater degree of discrimination. As a result, when the two indicators offer differing signals the Herfindahl index is likely more reliable.

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See also:

Herfindahl Index

Tobin’s q

Ratio Analysis

Risk Adjusted Return Measures: The Information Ratio

Price Multiples