Final answer:
To calculate the Herfindahl-Hirschman Index (HHI) for a firm with a 25% market share, you square the percentage: 25² = 625. The complete HHI calculation requires the market shares of all firms in the market. HHI is a measure of market concentration, with higher HHI indicating less competition.
Step-by-step explanation:
Calculating the Herfindahl-Hirschman Index (HHI)
To calculate the HHI for a given firm with a market share of 25%, you simply square the market share and sum the squares of the market share percentages for all firms in the market. Since we only have the market share for Firm A, we will calculate it as follows: 25² = 625. However, to calculate the complete HHI for the industry, you would need the market shares of all other firms in the industry.
Step 4 emphasizes that the HHI gives greater weight to large firms, which is why it is a better measure of market concentration than simple percentages. In scenarios with a small number of firms holding large portions of the market, like a monopoly or an oligopoly, the HHI will be much higher.
For example, the HHI for a firm with a 100% market share would be 100² = 10,000 (a perfect monopoly situation). Meanwhile, an extremely competitive industry with many small firms, say 100 firms, each with a 1% market share, would have an HHI of just 100(1²) = 100.