Problem

In industry A and industry B, there are 10 firms each. In industry A, the market share of the largest firm is 49%,
and the next three firms have 7% each, while the remaining firms have 5% each. In industry B, each of the four
large firms occupies 19%, and the share of the next largest firm is 14%. The remaining 5 small firms equally
divided 10% of the market. It is necessary to calculate the concentration level and the Herfindahl-Hirschman
Index (HHI) for the 4 largest firms in each industry.

Comment

To solve this problem, you need to know:

• How the Herfindahl-Hirschman Index (HHI) is calculated.

• How the concentration index (CR) is calculated.

We are asked to calculate the CR4 index, and for the Herfindahl-Hirschman Index (which is calculated for the
market as a whole), all the data is available.

Solution

Industry A

1. Herfindahl-Hirschman Index (HHI):

1. Concentration Ratio (CR4):

Industry B

1. Herfindahl-Hirschman Index (HHI):

1. Concentration Ratio (CR4):

Summary

• Industry A:

  • HHI: 2698

  • CR4: 70

• Industry B:

  • HHI: 1660

  • CR4: 76

This example illustrates the shortcomings of the concentration index (CR). While CR4 provides a quick snapshot
of market concentration, it does not capture the distribution of market shares among firms as effectively as the
Herfindahl-Hirschman Index (HHI).