C4 index

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The C4 index is a model for studying the concentration existing in the markets. Percentage reflects their situation in terms of competition, taking into account the situation and importance of the four largest companies operating in it.

This index, like so many others, is very useful for previous analyzes when entering a certain market, since it shows whether it is highly concentrated in a few firms that share their control or is more competitive and distributed among a greater number of participants.

With the evolution of economic studies, especially in the field of marketing, the market concentration indicator C4 has been gaining ground compared to other similar ones. This, thanks in large part to its simplicity when it comes to reflecting the competitive health of certain economies.

Following the same nature in the creation of this index, others have been developed, such as the well-known C8 that focuses on a wider range of companies. Also noteworthy is the Herfindahl-Hirschman (IHH), widely used for identical market study objectives taking into account even more companies.

Calculation of the C4 Index

This concentration indicator is quite simple to construct and understand, as it focuses on showing the participation percentages of the four largest companies or companies that are active in the chosen market. From them, for example, observe their market shares or their production or sales volumes in a particular period of time.

Index C4 = Sum% 4 largest companies

The sum of these values ​​will reflect the total of the index. For example, if in the national production of pianos there are 6 companies involved with the following annual sales volumes:

  • Company A, with 23% of the total
  • Company B, with 10%
  • Company C, with 4%
  • Company D, with 3%
  • Company E, with 16%
  • Company F, with 8%

The sum of the four largest would be the percentages of A, B, E and F; that is to say:

23+10+16+8= 57%.

We would find ourselves before a highly concentrated and moderately competitive market.

Interpretation of the values ​​reflected by the C4 Index

It is usually considered that values ​​higher than 60% percent of the total market reached among the four companies with the greatest power are related to markets known as high concentration, not very competitive and difficult to access for new participants.

The fact that high levels of concentration are obtained, and therefore a lower level of competition in the market, often leads to the largest firms maintaining control of it through different tools. One of them is joint pricing.

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