Concentration ratio indicates the relative size of firms in relation to their industry as a whole.

Four-firm concentration ratio
It consists of the market share (in percentage) of the four largest firms in an industry.

• Competitive market: below 40%
• Oligopoly: above 60%
• Monopoly: 100%
  

Herfindahl-Hirschman Index (HHI)
It is calculted by suming up the square of the market share of each firm in a market. HHI can range from close to zero to 10,000.

HHI = S1² + S2² + S3² + ... + Sn²
Where:
Si is the market share of the ith firm)

The closer a market is to being a monopoly, the higher the market's concentration (and the lower its competition). In general, the market is not competitive if HHI is above 1,800 and is a monopoly if HHI is 10,000 (=100²).

Limitation of concentration measures

• Do not take account of the barriers to entry
• Do not take account of geographical scope, e.g. local or global economy
• Definition of product, e.g. men’s shoes, female’s shoes or children’s shoes