Question

Consider an industry that has eight firms with the following market shares:

30

20

15

10

10

5

5

5

a. Calculate the four-firm concentration ratio for this industry. According to the calculated concentration ratio, what type of market is this?

b. Calculate the Herfindahl-Hirschman Index for this industry.  According to the calculated Herfindahl-Hirschman Index, what type of market is this?

c. The second largest firm decides to acquire one of the smallest firms in order to better compete with the largest firm. How will the Department of Justice and the Federal Trade Commission react to the proposed deal?

Answer 1

a)

C4 ratio=30%+20%+15%+10%=75%

C4 ratio lies between 50-80%. It is a case of medium concentrated market. It is close to oligopoly.

b)

HHI index is sum of squares of individual market shares of firms in the market.

HHI=30^2+20^2+15^2+10^2+10^2+5^2+5^2+5^2=1800

HHI is between 1500 and 2500, we can say that industry is moderatly concentrated. It is a case of oligopoly.

c)

Now share of second largest firm will be 25% and there will be 7 firms in the market.

HHI in this case is given by

HHI=30^2+25^2+15^2+10^2+10^2+5^2+5^2=2000

Change in HHI index is 200. (2000-1800). Since change in HHI index is more that 100 points, it is to be objected by department of Justice. It will require scrutiny.