   Chapter 25.1, Problem 2ST

Chapter
Section
Textbook Problem

Suppose that 20 firms are in an industry and that each firm has a 5 percent market share. What is the four-firm concentration ratio for this industry? What is the Herfindahl index?

To determine

Determine the four-firm concentration ratio and Herfindahl index.

Explanation

The four-firm concentration ration can be calculated using the formula as follows:

Four-firm concentration ratio=Highest market share of the four firms        (1)

Herfindahl index can be calculated using the formula as follows:

Herfindahl index=(S1)2+(S2)2++(Sn)2        (2)

Here

S1 and Sn are the market shares.

Assume 20 firms are there in an industry and each firm has the market share of 5 percent.

Use Equation -1 to calculate the four-firm concentration ratio as follows:

Four-firm concentration ratio=5%+5%+5%+5%=20%

Therefore, the four-firm concentration ratio is 20%.

Use Equation -2 to calculate Herfindahl index as follows:

Herfindahl index=((5)2+(5)2+(5)2+(5)2+

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