Question

In a market compromised of four firms, the first firm has a 51% market share, the second firm has a 36% market share, the third firm has a 9% market share, and the fourth firm has a 4% market share. What is the industry's concentration level using HHI?

Answer 1

The Herfindahl-Hirschman Index (HHI) for the industry with given market shares (51%, 36%, 9%, and 4%) is calculated to be 3994, indicating a high level of market concentration.

Step-by-step explanation:

To assess the industry's concentration level using the Herfindahl-Hirschman Index (HHI), we must square the market share of each firm and sum the results. Given the market shares of the four firms (51%, 36%, 9%, and 4%), the calculation steps are as follows:

1. Square the market share of each firm: (51², 36², 9², 4²).
2. Sum the squared market shares: 2601 (51²) + 1296 (36²) + 81 (9²) + 16 (4²).
3. Compute the HHI: 2601 + 1296 + 81 + 16 = 3994.

The HHI is 3994, which indicates a high level of market concentration since it gives greater weight to larger firms and the value is well above the threshold of 2500, which would suggest a high concentration.