Question

Suppose that the top six firms in an industry have total annual sales of $210 billion, $150 billion, $90 billion, $80 billion, $60 billion, and $10 billion, respectively.

Instructions: Round your final answers to the nearest whole number.

a. What is the four-firm concentration ratio for this industry?---- 88percent

b. What is the Herfindahl index for this industry?

c. Suppose another industry has a Herfindahl index of 3,000. Are firms in the second industry likely to have more or less market power?--- more

Answer 1

(a) Total Sales of industry = ($210 + $150 + $90 + $80 + $60 + $10) billion = $600 billion.

Total sales of top four firms = ($210 + $150 + $90 + $80) = $530 billion

Four firm concentration ratios = Total sales of top four firms / Total Sales of industry

Four firm concentration ratios = $530 billion / $600 billion = 0.88

(b) HHI is calculated by squaring the market share of each firm in the industry and then summing it.

Market share = (Firm sales / industry sales) * 100.

Firm	Firm's Sales (Billion Dollars)	Industry Sales (Billion Dollars)	Market Share	(Market Share)^2
1	210	600	35.00	1225.00
2	150	600	25.00	625.00
3	90	600	15.00	225.00
4	80	600	13.33	177.78
5	60	600	10.00	100.00
6	10	600	1.67	2.78

HHI = 1225 + 625 + 225 + 177.78 + 100 + 2.78 = 2355.56

Herfindahl Index for this industry is 2355.6

(c) Higher the HHI means that corresponding industry is more closer to monopoly. It means more market power.

Lower the HHI means that corresponding industry is more closer to the competitive market structure. It means less market power.

First industry has HHI value of 2355.6

Second industry has HHI value of 3000.

It means second industry has more market power.