Market concentration is the distribution of a given market among the participating companies. Market concentration is also known as seller concentration or industry concentration.
Market concentration is sometimes expressed as a concentration ratio (CR), which quantifies the distribution of a market among competitors. CR4, for example, expresses the percentage of the market that is controlled by the top four companies.
The more highly concentrated a market is, the less competitive it is. A market with low concentration is not dominated by any large players and is considered competitive. Markets with extremely low concentrations are said to be fragmented.
When a single business dominates a market, it is said to have a monopoly; a two-business concentration is known as a duopoly. When more than two companies (but still a small number) control a given market, the situation is known as an oligopoly.
Assessing concentration is an important part of the market research stage for business planning to gauge the feasibility entering a given market. Governments, on the other hand, often study markets to ensure that illegal or unethical practices aren’t contributing to anti-competitive environments, which can lead to unfair prices for consumers and other undesirable outcomes. Highly concentrated markets may result from collusion and anti-competitive practices, although they can also develop naturally. Anti-competitive practices may also be used to discourage startups and less-established companies trying to enter a highly concentrated market.