Consider two industries, industry Q and industry Z. In industry Q there are 10 companies, each with a market share of 10% of total sales. In industry Z, there are eight companies
One company has a 65% market share and each of the other seven firms has a market share of 5%.
a. Calculate the four-firm concentration ratio for each industry.
b. Calculate the Herfindahl-Hirschman Index (HHI) for each industry.
c. What do the values of the two concentration measures imply about the degree of market power in the two industries?
a. The concentration ratio in industry Q =10% + 10% + 10% + 10% =40%. The concentration ratio for industry Z = 65% + 5% + 5% + 5% = 80%.
b. The HHI for industry Q = 100 × 10 = 1,000 and the HHI for industry Z = 4,225 + (25 × 7 ) = 4,400.
c. Industry Q is at the low end of being considered moderately concentrated. Industry Z is highly concentrated. Market power is much greater in industry Z.
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