Question

Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 25%, 22%, 18%, 12%, 11%, 8%, and 4%.

Instructions: Enter your answers as whole numbers.

a. What is the four-firm concentration ratio of the hamburger industry in this town?

     

b. What is the Herfindahl index for the hamburger industry in this town?

     

c. If the top three sellers combined to form a single firm, what would happen to the four-firm concentration ratio and to the Herfindahl index?

      

Answer 1

Market share of firms are: 25%, 22%, 18%, 12%, 11%, 8%, 4%

a) Sum of top 4 firms = 25% + 22% + 18% + 12% = 77%

Four firm concentration ratio = 77% / 100% = 0.77

b) Herfindahl Index is calculated as sum of square of market share of all firms: 25^² + 22^² + 18^² + 12^² + 11^² + 8^² + 4^² = 1,778

c) If top three firms form a single firm, market share of all firms would be: 65%, 12%, 11%, 8%, 4%

Four firm concentraction ratio would be = 96% / 100% = 0.96

Herfindahl Index would be 65^² + 12^² + 11^² + 8^² + 4^² = 4,570

Rise in Herfindahl Index shows that market is shifting from perfectly competitive towards monopoly.