A concentration ratio measures the combined market shares of a given number of firms to the whole market size. It is a measure of market dominance by leading firms. We usually consider the 3-firm or 5-firm concentration ratio.

An oligopoly is defined when there is a 5-firm concentration ratio of greater than 60%. When the concentration ratio is high, a nation’s regulatory authorities may be concerned about a lessening of competition between firms causing damage to consumer welfare.

The concentration ratio is simple and intuitive. It is easy to calculate and interpret. It focuses only on the top n firms and excludes the market shares of smaller competitors. CR doesn’t indicate whether the market share is evenly distributed among the top n firms or dominated by one or two.