Studyledge

Market Structures, Costs and Revenue: Question 9

Syllabus 7.6.5, 7.6.1

Multiple choice A2 1 mark

A national market for steel pipe fittings is supplied by five firms whose market share is large enough to be individually measured, alongside many other very small producers that make up the rest of the market between them. By share of total market sales revenue, Firm A holds 32%, Firm B holds 24%, Firm C holds 9%, Firm D holds 6% and Firm E holds 5%, with the remaining 24% divided among the numerous small producers.

What is the 3-firm concentration ratio for this market?

Choose an answer to check it, then compare with the worked solution below.
Show worked solution Hide worked solution

Worked solution

Step 1: Recall the definition of an n-firm concentration ratio

The n-firm concentration ratio is the combined market share of the largest nn firms in an industry, used as a simple measure of how concentrated a market is. A high concentration ratio suggests a market dominated by a small number of large firms, a feature typically associated with oligopoly, while a low concentration ratio suggests a much more fragmented, competitive market structure.

Step 2: Identify and add the three largest firms’ shares

Ranking the firms by market share: Firm A (32%), Firm B (24%), Firm C (9%), Firm D (6%), Firm E (5%). The three largest firms are A, B and C.

32+24+9=6532 + 24 + 9 = 65

The 3-firm concentration ratio is 65%.

Step 3: Evaluate each option

  • Option A (56%): incorrect. This is the sum of only the two largest firms (Firm A and Firm B), which is a 2-firm concentration ratio, not the 3-firm ratio asked for.
  • Option B (65%): correct. This is the combined market share of the three largest firms, Firm A, Firm B and Firm C, exactly matching the definition of the 3-firm concentration ratio.
  • Option C (76%): incorrect. This adds all five named firms (32+24+9+6+5=7632+24+9+6+5=76), which goes beyond the three largest firms specified by the question.
  • Option D (22%): incorrect. This divides the correct sum of 65% by 3 to find an average share per firm, but a concentration ratio is defined as a sum of market shares, not an average.

Final answer

Option B. The 3-firm concentration ratio is 65%, the combined market share of the three largest firms, Firm A, Firm B and Firm C.