Final answer:
The industry's concentration level using HHI for five firms each with 20% market share is 2000, indicating a moderately concentrated market. The HHI emphasizes larger market shares more heavily, thereby providing a detailed measure of market concentration.
Step-by-step explanation:
You are analyzing a market with five firms where each firm accounts for 20% of the market share. To calculate the industry's concentration level using the Herfindahl-Hirschman Index (HHI), you would square the market share of each firm and then sum the results.
Since all five firms have an equal share of 20%, the calculation would be 5(20²) = 5(400) = 2000. This HHI indicates a moderately concentrated market. It is important to note that the HHI formula gives greater weight to larger firms.
For instance, in a comparison where one firm dominates the market with 77% and the rest have much smaller shares, even if the four-firm concentration ratio is the same, the HHI can provide a more accurate representation of market concentration. The HHI would be much higher in this scenario, indicating a less competitive market.