Suppose that a market contains 20 firms with the following market shares: 16 fir

Question

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 11111 c) Based on what you found in part (b), why is the HHI a better measure of industry concentration than the C4?

Explanation / Answer

There are 20 firms.
a) C4 is the concentration ratio of market share of top 4 firms. C4 = 20% + 15% + 10% + 7% = 52%

HHI is the squared sum of market shares. HHI = 10000*(20%^2 + 15%^2 + 10%^2 + 7%^2 + 16*(3%^2)) = 918

b) C4 does not change. HHI = 10000*(20%^2 + 15%^2 + 10%^2 + 7%^2 + 8*(6%^2)) = 1062

c) This is because C4 measures only the concentration of market power of only 4 firms and it is not influenced by what happens with the rest of the firms. HHI measures the changes happened in the composition of entire industry. Hence it is a better measure.

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