Horizontal Mergers are the most likely to be challenged under antitrust law, but when do mergers substantially reduce competition? One way mergers have been evaluated is by examining their effect on industry concentration. All else being equal, the fewer the firms the more concentrated the industry and the more likely collusion, either tacit or explicit.

This leaves us with the problem of measuring industrial concentration. One simple measure of industry concentration that has been used is the Four Firm Concentration Ratio (FFCR). The FFCR is simply the market share of the four largest firms in an industry.

Suppose an industry has six firms and the market shares of the four largest are 40%, 25%, 15%, and 10%. For this industry the FFCR would be .4 + .25 + .15 + .1 = .9. The maximum value of the FFCR is 1, which would mean there are four or fewer total firms in the industry in question, clearly a concentrated industry.

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