Question

(a) How is the concept of concentration in the United States affected by the presence of foreign firms (not foreign firms that have factories or offices in the United States, but foreign firms that produce in their home countries and then export to the United States and are not included in the measures of C4 and HHI). Do these foreign firms tend to increase or reduce the degree of concentration in U.S. industry? Please explain.

(b) An industry consists of three firms with equal annual sales. What is the industry's HHI and C4? Please show your calculations.

Answer 1

A. The presence of such foreign firms which produce somewhere else but still supply in the US, nevertheless does reduce industry concentration.

Let us remember that concentration is almost always defined from a consumer perspective. That is, how much of a market share in terms of sales does the firm have? When we show market share, we dont care where the product was manufactured. Similarly, in most of the cases, as far as firm's power is concerned, it doesnt matter where the production was. Yes it benefits to US laborers and government if the product was made in the US, but from a consumer's perspective it doesnt matter.

Hence, if a firm prdoduces somewhere else but nevertheless gains some market share in the US market, it is reducing concentration and hence, is beneficial for the consumers.

B. Three firms with equal annual sales means each form has 1/3 market share.

HHI is measured by squaring the market share of each firm competing in a market and then summing the resulting numbers. So, in our case

HHI= (1/3)²+(1/3)²+(1/3)²

HHI=1/3

Four firm concentration ratio in our case is 100%, because there are only 3 firms total in the market.