Limitations of the Concentration Ratio

An evaluative point to the use of the concentration ratio is that there may be problems defining the market. If a competition watchdog used the ratio to measure whether or not a firm is defined as a monopoly (if the ratio produces a result greaterthan 25%) how does it decide the width and depth of the market.

For example when trying to identify the market that Facebook lies in, would the watchdog include photo-sharing websites (as Facebook owns Instagram), does it also include phone apps. Calculating the size of the market may not be as simply as it first seems!

Also concentration ratios may provide a misleading result. If we are told that the 5-firm concentration ratio is 90%, this may mean that one firm has 80% of the market and the other 4 firms have the remaining 10% share. This is a worse situation (due to monopoly reasons) than if all firms had an 18% share each. Therefore we cant come to a conclusion on the market situation based solely on the results of the concentration ratio without more information.

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