Question

Suppose that a small town has six burger shops whose respective shares of the local market are (as

percentages of all hamburgers sold): 24%, 21%, 17%, 15%, 13%, 10%,

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. Assume that the top seller purchases the number three company (based market share) so that number one and number three firms are combined into a single firm. What is the

new four-firm concentration ratio and to the new Herfindahl index?

Answer 1

a) For calculating the four-firm concentration ratio, we consider the top 4 market shares.

Sum of their market shares = 24% + 21% + 17% + 15% = 77% = 0.77

Hence, the industry has medium concentration.

b) Herfindahl index = 24² + 21² + 17² + 15² + 13² + 10² = 1800

c) New market shares are 41%, 21%, 15%, 13% and 10%

Four-firm concentration ratio = 41% + 21% + 15% + 13% = 90%

Now, this industry becomes highly concentrated.

Herfindahl index = 41² + 21² + 15² + 13² + 10² = 2616