Question 3: Suppose that a market contains 20 firms with the following market sh

Question

Question 3: Suppose that a market contains 20 firms with the following market shares: 16 firms each has 3% market share One firm has a 7% market share . One firm has a 10% market share One firm has a 15% market share One firm has a 20% market share a) Calculate the C4 and the HHI for this industry b) Suppose that each of the 16 smallest firms underwent mergers to form 8 firms each with a 6% market share. Calculate the G and the HHI. c) Based on what you found in part (b), why is the HHI a better measure of industry concentration than the C?

Explanation / Answer

a) HHI is the sum of squares of market share of all the firms in the industry

In this case, 16 firrms hs 3% market share

One firm has 7% market share

One firm has 10% market share

One firm has 15% market share

One firm has 20% market share

HHI = m12 + m22 + m32 + ......................... + mn2

So HHI = 16*32 + 72 + 102 + 152 + 202

So HHI = 918

C4 is the concentration of the four largest firms in the market

Concentration ratio is the total market share of larget firms in the market

In this case, we need to find the market share of four largest firm

Market share of four largest firms are 7%, 10%, 15% and 20%

So total market share of these firms = 7+10+15+20 = 52%

Therefore, C4 = 52%

b) No each of 16 small market share firm is merged to form 8 firms with 6% market share

So HHI = 8*62 + 72 + 102 + 152 + 202

So HHI = 1062

C4 would be the same as the market share of four largest firms are same, so C4 = 52%

c) HHI is better measure because it tells the industry concentration by taking in consideration all the firms operating in the industry where as Concentration ratio in this case C4 just tells the market share of largest firms in teh industry in this case larget four firms. As in case b, when firms get merged market gets more concentrated than before which is being shown in HHI but not in C4 ratio.

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