Question

In a five firm industry. The top four firms have market shares of 40%, 20%, 18%, and 17.3%,. Compute the Herfindahl-Hirschman index for the industry. Hint 1: You will need to calculate the market share of the fifth firm first. Hint Two: Write your answer to two decimal places. Hint Three: When calculating the HHI remember 10% market share is 10 not 0.10 .

Answer 1

Answer : Let 5th firm's market share is X%.

In Herfindahl-Hirschman Index (HHI) the whole market is 100%.

As there are 5 firms in the industry hence,

Whole market = Sum of all fims' market shares

=> 100% = 40% + 20% + 18% + 17.3% + X%

=> 100% = 95.3% + X%

=> X% = 100% - 95.3%

=> X% = 4.7%

Therefore, the 5th firm's market share is 4.7%.

HHI = Sum of squares of all firms' market shares

=> HHI = (40)^2 + (20)^2 + (18)^2 + (17.3)^2 + (4.7)^2

=> HHI = 1600 + 400 + 324 + 299.29 + 22.09

=> HHI = 2645.38

Therefore, here the industry's Herfindahl-Hirschman Index is 2645.38 .