Suppose that a small town has seven burger shops whose respective shares of the

Question

Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 26%, 25%, 21%, 12%, 8%, 5%, and 3%. Instructions: Enter your answers as whole numbers. a. What is the four-firm concentration ratio of the hamburger industry in this town 84% b. What is the Herfindahl index for the hamburger industry in this town? c. If the top three sellers combined to form a single firm, what would happen to the four-firm concentration ratio and to the Herfindahl index? Four-firm concentration ratio- Herfindahl index

Explanation / Answer

Solution:-

(A). Four-firm concentration ratio = Total Market share (in percentage) of largest four firms in industry.

                                                           = 26 % + 25 % + 21 % + 12 %

                                                           = 84 %

Four-firm concentration ratio = 84 %

(B). Herfindahl index = Square of market share (in percentage) of all the firms in same industry.

                                     = [(26)2 + (25)2 + (21)2 + (12)2 + (8)2 + (5)2 + (3)2]

                                     = [676 + 625 + 441 + 144 + 64 + 25 + 9]

                                     = 1984.

Herfindahl index of Hamburger industry = 1984.

(C).Four-firm concentration ratio = (26 % + 25 % + 21 %) + 12 % + 8 % + 5 %

                                                    = 72 % + 12 % + 8 % + 5 %

                                                    = 97 %

Four-firm concentration ratio = 97 %.

Herfindahl index = [(72)2 + (12)2 + (8)2 + (5)2 + (3)2]

                                      = [5184 + 144 + 64 + 25 + 9]

                                      = 5426.

Herfindahl index = 5426.

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