Ways to Measure Industry Concentration

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Q1. There are a number of ways to analyze industry concentration. Three ways commonly used are the n-firm concentration ratio, the Herfindahl Index and even the Gini coefficient. These will be discussed in turn for their mechanics and the way that they are, or can be, used in assessing industry concentration. The n-firm concentration ratio is a measure of the size of a group of companies relative to the size of the industry as a whole. It measures the market share of the top n firms in the industry, to determine the degree of concentration in the industry. A common number chosen is four, but any number could be chosen in order to assess industry concentration. That flexibility makes the n-firm concentration ratio useful, but as the choice of number for 'n' is arbitrary, the n-firm concentration ratio is also inconsistent. It does, however, have a number of different uses. One use is to help define the state of competition within an industry. Using a 2, 3 or 4-firm concentration ratio can help to understand if an industry is in a state of oligopoly or duopoly, for example. This understanding would then contribute to public policy decisions with respect to antitrust issues, mergers and acquisitions, privatizations and deregulations. The four-firm concentration ratio is often used in studies of industry structure and behavior, for example in Aerts, Cormier and Magnan (2007), to test the effects of different inputs on industry concentration. An industry like the smartphone
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