Question

How would you calculate the HHI for an industry?

O by summing the market shares for each firm in the industry and multiplying by 2

O by summing the squares of the market share of each firm in the industry

O by gathering data on total sales of the firms in the industry and dividing the sum by 7

O by multiplying industry sales by .77.

Answer 1

To calculate the HHI, sum the squares of the market shares of each firm in the industry. For instance, an industry with firms each holding 1% market share would have an HHI of 100, while a more complex industry as per Table 11.1 results in an HHI of 744.

Step-by-step explanation:

To calculate the Herfindahl-Hirschman Index (HHI) for an industry, you follow the method of summing the squares of the market share of each firm within that industry. For example, if an industry has 100 firms, and each firm has 1% of the market, the HHI would be calculated as 100(1²), which equals 100. In a more varied market scenario reflected in Table 11.1, the HHI would be calculated by summing the squared market shares like this: 16² + 10² + 8² + 7(6²) + 8(3²) resulting in an HHI of 744.

This calculation indicates how concentrated an industry is, with a higher HHI pointing to a greater level of concentration.