Industry concentration measures how market share is divided among companies in an industry. A highly concentrated market is dominated by one or a few companies, while a low concentration has many smaller companies. Investors seek out companies with the largest market share in a highly concentrated industry. Industry concentration is studied using an industry concentration ratio, which shows the market share of the top companies. Companies in a highly concentrated market have an advantage over those in a fragmented market. Investors target companies at the top of a concentrated industry for their consistency and reliability.
Industry concentration is an economic measure of how market share in a specific industry is divided among the companies operating within it. If one or a few companies dominate most of a market, that sector is said to be highly concentrated. When an industry has a large number of smaller companies, all containing small percentages of the overall market share, the industry concentration is low. This information can be useful for investors, who are more likely to seek out companies that have the largest share of the market in a highly concentrated industry.
Every industry has a certain hierarchy in terms of companies at the top dominating the market and those at the middle and bottom wanting to make it to the top. While that hierarchy may change over time, the major players in an established industry are likely to remain the same. Newer industries may be fragmented at first before settling down to a point where major players begin to gobble up large portions of the market. The study of how market share is divided among companies in an industry is known as industry concentration.
One way this is studied is through the use of what is called an “industry concentration ratio”. The ratio is calculated by taking a certain group of companies, usually the top four in a market, and adding up all the market share they hold. A low ratio indicates a highly fragmented market. If the ratio approaches 100, it indicates that the market is highly concentrated and a small number of companies dominate the majority of the market.
A company that is among the best in a highly concentrated market has a distinct advantage over companies that struggle against it in a fragmented market. Any company that has a high industry concentration need not worry so much about the competition and can focus their energy on increasing the profit margin. Conversely, companies in a fragmented market must keep prices low to remain competitive, thereby hurting profits.
Investors pay attention to data on industry concentration. Companies at the top of a concentrated industry are often targeted by investors for their consistency and reliability. On the other hand, a company in a still relatively young industry may have greater potential. Stock for such a business can be obtained at a low price, but has great potential if both the industry and the business rise to higher levels.
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