Final answer:
The four-firm concentration ratio concentrates primarily on the largest firms in an industry, while the Herfindahl-Hirschman Index accounts for the market shares of all firms, providing a more comprehensive view of market concentration. Market definition plays a crucial role in determining these concentration figures.
Step-by-step explanation:
Understanding Market Concentration Measures
Market focus pertains to how a firm targets its products or services to a specific market segment. Discussing market focus in the context of market concentration measures, we look at indexes like the four-firm concentration ratio and the Herfindahl-Hirschman Index (HHI). The four-firm concentration ratio calculates the combined market share of the four largest firms in the industry; thus, it inherently puts more emphasis on the presence of one or two very large firms, potentially overlooking the impact of smaller firms. In contrast, the HHI takes into account the market shares of all firms in an industry, giving a more balanced view that reflects the overall market concentration, including the influence of smaller firms. Defining the industry can greatly affect these measures, as a narrowly defined market tends to have higher concentration figures than a broadly defined market would.
For instance, in the case of Microsoft's market share, defining the market for just computer operating systems showed Microsoft as highly dominant. However, when expanding the scope to include all computer software and services, its market concentration appeared considerably smaller. This example illustrates how market definition critically influences perceptions of market concentration and competitiveness.