Consider two industries, industry W and industry X. In industry W there are five companies, each with a market share of 20% of total sales. In industry X, there are six companies
One company has a 50% market share and each of the other five firms has a market share of 10%.
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?
Figure 15-18
a. The concentration ratio in industry W =20% + 20% + 20% + 20% = 80%. The concentration ratio for industry X = 50% + 10% + 10% + 10% = 80%.
b. The HHI for industry W = 400 × 5 = 2,000 and the HHI for industry X = 2,500 + (100 × 5 ) = 3,000.
c. Both industries are highly concentrated. Although the concentration ratios are the same for each industry, market power is more significant in industry X. The ability to raise prices is greater in industry X.
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