EBK ECONOMICS
EBK ECONOMICS
21st Edition
ISBN: 8220106637173
Author: McConnell
Publisher: YUZU
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Chapter 13, Problem 1P
To determine

The four-firm concentration ratio and Herfindahl index.

Expert Solution & Answer
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Explanation of Solution

The four-firm concentration ratio helps to identify the extent of the market share handled by the four largest firms in the industry. The four largest firms’ market shares are 23%, 22%, 18% and 12% respectively. The four-firm concentration ratio can be calculated by adding the market shares of the four largest firms in the industry as follows:

Four-firm concentration ratio=[(Market shareFirm 1)+(Market shareFirm 2)+(Market shareFirm 3)+(Market shareFirm 4)]=[(23)+(22)+(18)+(12)]=75

Thus, the four-firm concentration ratio is 75%.

The Herfindahl index can be calculated by squaring the market share of each firm and summing them together.  We have the market shares of the industry as follows: 23, 22, 18, 12, 11, 8 and 6. The Herfindahl index can be calculated as follows:

Herfindahl indexIndustry A=[(Market shareFirm 1)2+( shareFirm 2)2+( shareFirm 3)2+( shareFirm 4)2+( shareFirm 5)2+( shareFirm 6)2+( shareFirm 7)2]=[(23)2+(22)2+(18)2+(12)2+(11)2+(8)2+(6)2]=[529+484+324+144+121+64+36]=1072

The HHI index of the industry is 1072.

When the top three firms are combined to form a single firm, the four-firm concentration ratio as well as the Herfindahl index will change as follows:

The four-firm concentration ratio helps to identify the extent of the market share handled by the four largest firms in the industry. The four largest firms’ market shares are 63%, 12%, 11% and 8%, respectively. The four-firm concentration ratio can be calculated by adding the market shares of four largest firms in the industry as follows:

Four-firm concentration ratio=[(Market shareFirm 1)+(Market shareFirm 2)+(Market shareFirm 3)+(Market shareFirm 4)]=[(63)+(12)+(11)+(8)]=94

Thus, the new four-firm concentration ratio is 94%.

The Herfindahl index can be calculated by squaring the market share of each firm and summing them together.  We have the market shares of the industry as follows: 63, 12, 11, 8 and 6. The Herfindahl index can be calculated as follows:

Herfindahl indexIndustry A=[(Market shareFirm 1)2+ (Market shareFirm 2)2+ (Market shareFirm 3)2+ (Market shareFirm 4)2+ (Market shareFirm 5)2]=[(63)2+ (12)2+ (11)2+ (8)2+ (6)2]=[3969+144+121+64+36]=4334

The new HHI index of the industry is 4334.

Economics Concept Introduction

Concept introduction:

Four-firm concentration ratio: The four-firm concentration ratio is the total market share handled by the four largest firms in the industry. It helps to identify the extent of the market controls of the four largest firms in the industry.

Herfindahl index: The Herfindahl index is the measure of the concentration of the market. The concentration in the market can be calculated by squaring the market share of each competing firms in the industry and summing them. Usually the HHI value ranges from 0 to 10,000.

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