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Measuring Industry Structure

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Presentation on theme: "Measuring Industry Structure"— Presentation transcript:

1 Measuring Industry Structure
Markets work well when firms are small relative to the size of the market, that is, when market concentration is “low”.

2 How to measure the industry concentration
Two commonly used measures or indexes, are: Concentration Ratio: CRn – the market share of the top n firms – commonly reported as CR4 and CR8 (CR4 = 0.71 means that the biggest 4 firms in the industry have a 71% market share) – information given by these indices is partial, it doesn’t take into account the whole distribution of market shares

3 • Herfindahl-Hirschman Index (HHI) – For an industry with N firms, HHI = where si is the market share of the ith firm. – The HHI captures both the average firm size and the inequality of size between firms

4 EXAMPLE Industry A 10 firms, each firm has 10% market share Industry B 11 firms, one firms has 90% market share, each of the remaining none firms has 1%. Both industries have (almost an) equal number of firms, but the size distribution is very different.

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