Question

A market has 5 firms. One firm has a market share of 50%, a second 35%, and the other three 5% each. What is the Herfindahl index for this market? Based on your result, determine the intensity of price competition.

Answer 1

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Answer
Herfindalh index measures the degree of intensity of competition in an industry . The index is calculated by squaring the market shares of different firms and then adding them up .

Herfindahl index

= 50²+35²+5²+5²+5²
= 2500+1225+25+25+25
= 3800

3800 is the herfindahl index of the market

THe market is moderately concentrated when the Index is between 1500 points and 2500 points . A market with an index greater 2500 is considered highly concentrated .
THe greater the index, greater the power and lower the price competition .

As the index is 3800 (greater than 2500) . The price competition is less intense and it is close to become a monopoly .