Final answer:
The Herfindahl-Hirschman Index (HHI) is used to measure market concentration by squaring the market shares of each firm in the industry and adding up the values of the squares. It helps assess the level of competition in a market.
Step-by-step explanation:
The subject of this question is Business and the grade level is High School.
The approach mentioned in the question is called the Herfindahl-Hirschman Index (HHI) and it is used to measure market concentration. The HHI is calculated by squaring the market shares of each firm in the industry and then adding up the values of the squares. This index helps to assess the level of competition in a market.
For example, if there are four firms in an industry with market shares of 20%, 30%, 15%, and 35%, the calculation would be:
(0.2^2) + (0.3^2) + (0.15^2) + (0.35^2) = 0.04 + 0.09 + 0.0225 + 0.1225 = 0.2825