Question

Explain the differences in the four-firm concentration ratio, the Herfindahl-Hirschman Index, the Rothschild index, and the Lerner index for the perfect competitive industry and the monopoly.

Answer 1

Solution:

Four firm concentration ratio and Herfindahl-Hirschman index are tools to assess the concentration of firms in the industry.

In perfect competition, since there are large number of firms and all are price takers, both four firm concentration ratio and Herfindahl-Hirschman index are close to zero. In monopoly, since there is only one firm which controls the market, both four firm concentration ratio and Herfindahl-Hirschman index are 100 and 10000 (square of 100) respectively.

Lerner index for the perfect competitive industry is zero because firms have no market power whereas it is close to 1 for monopoly.

Similarly, Rothschild index for the perfect competitive industry is zero because firms have no market power whereas it is close to 1 for monopoly.