Question

if you only had one choice to make out of the two.....which is a "better measure" of competitive balance in the sports environment:  The HHI (Hirfindahl Hirschman Index) or The Ratio? Overall, Choose one as your preferred method....but ....be sure to explain both methods; & WHY you prefer one over the other!!

please write two paragraphs, one explaining each method and the second paragraph contains which is better and why.

Answer 1

The Herfindahl-Hirschman Index (HHI) is a common measure of market concentration and is used to determine market competitiveness, often pre- and post-M&A transactions. The Herfindahl-Hirschman Index (HHI) is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. It can range from close to zero to 10,000. A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.

The primary advantage of the Herfindahl-Hirschman Index (HHI) is the simplicity of the calculation necessary to determine it and the small amount of data required for the calculation. The primary disadvantage of the HHI stems from the fact that it is such a simple measure that it fails to take into account the complexities of various markets in a way that allows for a genuinely accurate assessment of competitive or monopolistic market conditions. While the concentration ratio adds market shares of a small number of firms in the market, the so-called Herfindahl index (also known as Herfindahl–Hirschman index) considers the full distribution of market shares. The Herfindahl index provides a better measure of concentration as it captures both the number of firms and the dispersion of the market shares. And moreover the U.S. Department of Justice uses the HHI for evaluating potential mergers issues.