Final answer:
The four-firm concentration ratio emphasizes the largest firms in a market, while the Herfindahl-Hirschman Index accounts for the market share of all firms, giving a more nuanced view of market concentration. Mergers between smaller firms can impact both measures by altering market share distributions. Additionally, changes in input costs can cause firms to switch production technologies to minimize total costs and maintain competitiveness.
Step-by-step explanation:
The four-firm concentration ratio does indeed put more emphasis on the largest firms in a market, particularly the top four firms in terms of sales or market share. This is because it calculates market concentration by adding up the market shares of the four largest firms in an industry. On the other hand, the Herfindahl-Hirschman Index (HHI) considers the market share of all firms within the market, which gives a more detailed view of market concentration and competition levels. The HHI squares the market share of each firm before summing them up, giving additional weight to firms with larger shares.
Regarding a merger between two firms that are not among the top four by size, such a merger can indeed affect both the four-firm concentration ratio and the Herfindahl-Hirschman Index. It can raise the combined market share of the merged entity, potentially breaking it into the top four, thereby changing the concentration ratio. Additionally, because the HHI takes into account the square of market shares of all firms, the merger will also affect this index by increasing the combined entity's squared market share sum.
In response to changes in costs, firms may adjust their production technologies. If, for example, the cost of machines increases, firms are likely to shift towards technologies that use less capital and more labor, assuming labor becomes relatively cheaper due to the increase in capital costs. This is consistent with the concept of substituting towards the less expensive factor of production.