Question

1. A market has six competitors in it, with the following total sales amounts:

FIRM	Total sales
A	$ 200 (million)
B	400
C	300
D	500
E	600
F	800

1. Calculate the four firm concentration ratio for this industry.

2. Calculate the Herfindahl index for this market.

3. Based on your calculation in (b), would you classify this market as moderately or highly oligopolistic? Why?

Answer 1

a. Concentration ratio: Ratio that indicates the size of firms in relation to their industry as a whole.

Total sales= 2800 million $

This is calculated as the sum of the market share percentage held by the largest specified number of firms in an industry.

In this case, Firms F, E, D, B and C are largest. If we take their market shares as percentages then,

For Firm F: It will be :(800/2800)*100= 28.57%

For firm E it will be: (600/2800)*100= 21.42%

For Firm D it will be (500/2800)*100= 17.85%

For firm B it will be : (400/2800)*100= 14.28 %

For firm C it will be : (300/2800)*100= 10.71 %

Adding them together, (28.57+21.42+17.85+14.28+10.71)= 92.83 %

Even for top four firms, the market share is 82.12 and hence it is oligopoly.

b. Herfindahl index: It is calculated by squaring the percentage share (stated as a whole number) of each firm in an industry, then summing these squared market shares to derive a HHI.

In this case, (28.57+21.42+17.85+14.28+10.71)² = 816.24+458.81+318.62+203.01+114.70= 1911.38

c. A rule of thumb is that an oligopoly exists when the top five firms in the market account for more than 60% of total market sales.

This market is Oligopoly.