Which of the following best describes the four-firm concentration ratio in an industry?

• A. It is the average market share of all firms in the industry.
• B. It is the difference between the sales of the largest and smallest firm in the industry.
• C. It is the percentage of total industry sales accounted for by the four largest firms.
• D. It is the ratio of the profits of the four largest firms to the total industry profits.

Answer: (C)

Verified step by step guidance

1. Understand that the four-firm concentration ratio measures market concentration by focusing on the largest firms in an industry.
2. Recognize that it is calculated by summing the market shares of the four largest firms in the industry.
3. Express the four-firm concentration ratio mathematically as: \(\text{CR}_4 = S_1 + S_2 + S_3 + S_4\), where \(S_i\) represents the market share of the \(i^{th}\) largest firm.
4. Note that the market share \(S_i\) is usually expressed as a percentage of total industry sales, so the ratio reflects the combined percentage of sales by the top four firms.
5. Conclude that this ratio helps to understand the degree of competition or market power held by the largest firms in the industry.