Question

Calculate the Herfindahl-Hirschman Index (HHI) for each of the following markets.

Market A has two firms, each with a market share of 50 percent.

The HHI of these two firms is _______

Market B has two firms, one with a market share of 90 percent and the other with a market share of 10 percent.

The HHI of these two firms is _______

Market C has firms, 5 with a market share of 16 percent each and 5 with a market share of 4 percent each.

The HHI of these firms is _______

Market D has firms, 2 with a market share of 34 percent each and 8 with a market share of 4 percent each.

The HHI of these firms is _______

Using your results, arrange the markets from most competitive to least competitive.

A. Market B, Market A, Market D, Market C

B. Market C, Market D, Market A, Market B

C. Market D, Market C, Market B, Market A

D. Market C, Market B, Market A, Market D

Answer 1

The HHI is calculated as

where s = percentage share of the market firm in the whole number

Market A
HHI=50^2+50^2=5000
Market B
HHI=90^2+10^2=8200
Market C
HHI=16^2+16^2+16^2+16^2+16^2+4^2+4^2+4^2+4^2+4^2=1360
Market D
HHI=34^2+34^2+4^2+4^2+4^2+4^2+4^2+4^2+4^2+4^2=2440

The higher the HHI the lesser the competition

1360<2440<5000<8200
Market C<Market D<Market A<Market B

The correct option is, therefore, option B
Market C, Market D, Market A, Market B