Question

Both the concentration and Herfindahl indices computed by the U.S. Bureau of Census tends to overstate the actual level. In addition, they understate the degree of concentration in local markets (gasoline, for example). Explain why we make these statements.

Answer 1

Calculation of concentration ratios and HHI is overstated because some of the players included are foreign players and the calculation does not consider the individual contribution of smaller unorganized players in the industry. It increases the value of these ratios and indices. Further, data aggregation is used to make these calculations. It overstates the rations.  In contrast to it, local market concentrations such as in the market of gasoline, there are few companies, but there is a use of national and state market data. It considers all the conditions that a nation can face. It makes to understate the market concentration at the local level. As a result, there is an understated ratio and indices for the local market.