Question

Based on the following data, estimate the four firms’ concentration ratio based on the Herfindahl–Hirschman Index. Interpret your results.

1)65, 15, 10, 10

2) 30, 30, 20, 20

Answer 1

1) The Herfindahl–Hirschman Index is given by HHI= S₁²+S₂²+...+S_n² where n is the total number of firms and S_i denotes the market share of respective firm.

Therefore in the following data set 65, 15, 10, 10 the HHI can be calculates as:

HHI = 65²+15²+10²+10²

HHI = 4650

The HHI data interprets the market competetiveness as a measure of the market concentration. The HHI can range from close to 0 to 10000. The HHI is characterised in the following manner:

HHI<1500 - competetive marketplace

1500<HHI<2500 - moderately concentrated marketplace

HHI>2500 - highly concentrated marketplace

Therefore, in the above given data set we can say that the HHI = 4650 depicts a highly concentrated marketplace.

2.

The Herfindahl–Hirschman Index is given by HHI= S₁²+S₂²+...+S_n² where n is the total number of firms and S_i denotes the market share of respective firm.

Therefore in the following data set 30, 30, 20, 20 the HHI can be calculates as:

HHI = 30²+30²+20²+20²

HHI = 2600

The HHI data interprets the market competetiveness as a measure of the market concentration. The HHI can range from close to 0 to 10000. The HHI is characterised in the following manner:

HHI<1500 - competetive marketplace

1500<HHI<2500 - moderately concentrated marketplace

HHI>2500 - highly concentrated marketplace

Therefore, in the above given data set we can say that the HHI = 2600 depicts a highly concentrated marketplace.

Comparing both the given cases we can say that although both are considered to be highly concentrated marketplaces, the HHI of (1) is larger than the HHI of (2). Therefore we can conclude that in situation (1) the firms have high disparity in size as HHI increases when the disparity in the size increases.