Question

The herfindahl index suppose that three firms make up the entire wig manufacturing industry. one has a 50% market share, and the other two have a 25% market share each. the herfindahl index of this industry is . mane attraction, one of the firms with a 25% market share in the wig manufacturing industry, leaves the market. this would cause the herfindahl index for the industry to . the largest possible value of the herfindahl index is 10,000 because: an index of 10,000 corresponds to 100 firms with a 1% market share each an industry with an index higher than 10,000 is automatically regulated by the justice department an index of 10,000 corresponds to a monopoly firm with 100% market share

Answer 1

Part A:

Given that three firms make up the entire wig manufacturing industry. One has a 50% market share, and the other two have a 25% market share each. The Herfindahl index of this industry is given by:

The Herfindahl-Hirschman index (HHI) is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers, and can range from close to zero to 10,000.

Therefore, the Herfindahl-Hirschman Index is given by:


`HHI=50^2+25^2+25^2=2500+625+625=3750`



Part B:

Mane attraction, one of the firms with a 25% market share in the wig manufacturing industry, leaves the market. This would cause the herfindahl index for the industry to increase.

The HHI increases as firms leaves the market. As firms leaves the market the shares of the market previously held by the leaving firms are shared amongst the remaining firms in the market thereby increasing the HHI.

For instance, assumint the firm with 50% of market share acquired additional 10% of the leaving firm's market share and the other firm with 25% acquired the remaining 15%.

The new HHI is given by:


`HHI=60^2+40^2=3600+1600+625=5200`



Part C:

The largest possible value of the herfindahl index is 10,000 because: an index of 10,000 corresponds to a monopoly firm with 100% market share.