Concentration ratio indicates the relative size of firms in relation to their industry as a whole.
Four-firm concentration ratio
It consists of the market share (in percentage) of the four largest firms in an industry.
- Competitive market: below 40%
- Oligopoly: above 60%
- Monopoly: 100%
Herfindahl-Hirschman Index (HHI)
It is calculted by suming up the square of the market share of each firm in a market. HHI can range from close to zero to 10,000.
HHI = S12 + S22 + S32 + ... + Sn2
Where:
Si is the market share of the ith firm)
The closer a market is to being a monopoly, the higher the market's concentration (and the lower its competition). In general, the market is not competitive if HHI is above 1,800 and is a monopoly if HHI is 10,000 (=1002).
Limitation of concentration measures
- Do not take account of the barriers to entry
- Do not take account of geographical scope, e.g. local or global economy
- Definition of product, e.g. men’s shoes, female’s shoes or children’s shoes
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