Question

A Herfindahl-Hirschman Index is calculated by

A. summing the advertising expenditures of the firms that want to merge by total industry advertising expenditures.
B. summing the amount of sales by the four largest firms and dividing by total industry sales.
C. dividing the number of firms wanting to merge by the total number in the industry.
D. summing the squares of the market shares of each firm in the industry.

Answer 1

Option D: Summing the squares of the market shares of each firm in the industry.

Step-by-step explanation:

The Herfindahl-Hirschman index (HHI) is a use worldwide as measure of market concentration. It's calculation is based on squaring the market share of each firm competing in a market, and thereafter the resulting numbers are summed up. It commonly range known is simply from zero to 10,000. It is used by U.S. Department of Justice uses for potential mergers issues evaluation. It is a measure of industry concentration by the sum of the squares of the market shares held by each of the firms in the industry.

The Herfindahl index shows a decrease in competition and an increase of market power, when there is an increase and decreases is the opposite.