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“Everybody a concentration ratio is a very useful tool to help us categorize a market market structure a concentration ratio is very simply just the collective market share of the firms in an industry and the way we write a concentration ratio is always in this form where n is the total number of firms that we re looking to work out the concentration ratio for so for example if it s the 4 firm concentration ratio and is going to be 4. We then write down and then we look at the total market share of the 4 largest individual companies in this case if it s a 4 firm concentration ratio if it s a 3 firm concentration ratio and will be 3 and then we add up the market shares the total market shares are the three individual largest companies in that industry. The best way to be good at this is to practice using examples. Let s think number one.
The morn is a made up example. We have four firms in green abc and e. And we have that individual market shares we need to work out the four firm concentration ratio or great we just need to add up these four numbers here 25 plus. 10.
35. Plus. 15. Is 50 plus.
20 is 70. So the way we write it down for firms. Their collective market share is 70 simple done let s move on to the next one the next one we re looking at the global soft drink industry. This is a real life example you ve got two major plays.
Coca cola and pepsi and then we have a category for others all the other firms in their collective market shares and we need to work out the two firm concentration ratio now beware whenever you see others ignore it in a concentration ratio. We re always looking to add up the market shares of the largest companies individually not as a group so here the two therm concentration ratio. We re looking to add up the market shares of the two individual largest companies. That s coca cola and pepsi.
Others. Do not count. So here. It s going to be 49 plus 22 that s 71 so we write down to the two therm concentration ratio so to go along 71 that s the collective market share of these two firms.
Great example. Number three is the energy industry in the uk and you can see there are six major plays here and again look we have this others category. We ignore that we are looking for the 6 4. Concentration ratio.
So cut out others we ve got six firms here. If we add up their collective market shares. So up to eight here we ll get to 92 percent so we can write down six six femme concentration ratio 92 percent is the collective market share so six 92 done that s the concentration ratio. Happy days look how easy that is super simple we can just move on done and dusted.
But one thing to bear in mind with concentration ratios. It is the collective market share of the largest firms in industry. So what we can t get is individual dominance from this concentration ratio. So we don t know if there is one company that s really dominating and taking the majority of that market share something to bear in mind is just the collective of the number of firms were looking to work out.
But that s a concentration ratio. Very useful especially when it comes to the next video looking at oligopoly stay tuned for that i ll see you in that video guys. ” ..
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