Question

Food industry, Lerner Index = 0.26 and markup factor = 1.35

Tobacco industry, Lerner Index = 0.76 and markup factor = 4.17

Textiles industry, Lerner Index = 0.21 and markup factor = 1.27

Apparel industry, Lerner Index = 0.24 and markup factor = 1.32

We have four different industries, explain how to interpret the HHI measure for each of the four industries chosen.

Answer 1

The HHI index is a measure of the size of firms in relation to the industry and the amount of competition among them. So, it is given by the sum of square of the market shares of firms within the industry. Now, as the “HHI” index increases implied the level of competition decreases and the monopoly power increases.

Now, we have given the “Lerner Index” for each of the industry. So, here for “Textile” the “Lerner Index” is least, => this particular industry having least monopoly power and relatively more competition, => the HHI index should also be lower for that particular industry compare to all the given industry.

Now, for “Tobacco” the “Lerner Index” is maximum, => this particular industry having maximum monopoly power and relatively less competition, => the HHI index should also be higher for that particular industry compare to all the given industry.

Now, we can rank all the industry from higher HHI to lower HHI. So, “Tobacco”, “Food”, “Apparel” and “Textiles”.