Question

define the four- firm concentration ratio. discuss some of the problems in calculating and interpreting it does it reflect the degree of monopoly power in an economically meaningful sense? explain how does the herfindahl-hirschman address these problems?

Answer 1

the four form concentration ratio is an economic measures which can be used to identify the concentration of market power in the market. It is basically the sum of the market shares of top four firms in the market.

It is not an accurate measure and therefore it is not used widely. This is because there are markets with many firms and different market shares. The resultant value of four firm concentration ratio is not reflective of whether only one firm has a greater market share and the remaining three have a smaller market share or all of them have equal market share. Due to this reason it is not a meaningful representation of monopoly power because it cannot predict the same with accuracy

The herfindahl index is a more accurate measure because it is the sum of the squares market share of all the firms in the market. Because it includes all the firms and not only few of them, the resultant concentration ratio is a better reflection of the market power.