Question

Does either the four-firm concentration ratio or the HHI directly measure the amount of competition in an industry? Why or why not?

Answer 1

Yes, both of them directly measure the amount of competition in an industry but not with perfect precision. The four- firm concentration ration only focuses of the four major firm's output of an industry. But at the same time it neglects the output of others, may be lower but still must be kept under consideration.

On the other hand, the HHI method calculates this competition by squaring the market share of each firm taking part in market competition and then the total numbers are added to vary from 0-1000. This is a more precise method than the four firm concentration as it considers the share of each and every firm.