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Measuring Market Concentration. Slide Contents This set of slides covers the basics of: – Concentration Ratios – Herfindahl–Hirschman Index.

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Presentation on theme: "Measuring Market Concentration. Slide Contents This set of slides covers the basics of: – Concentration Ratios – Herfindahl–Hirschman Index."— Presentation transcript:

1 Measuring Market Concentration

2 Slide Contents This set of slides covers the basics of: – Concentration Ratios – Herfindahl–Hirschman Index

3 Concentration Ratios Concentration Ratios attempt to measure market concentration since “a few firms” isn’t precisely defined. In reality, that may range from two or ten or more. A four-firm concentration ratio (CR 4 ) is defined as the percentage of sales accounted for by the largest four firms.

4 Concentration Ratios

5 EXAMPLE: Calculate the CR 4 for the following industry: Total Revenues (in millions) Firm 1$105Firm 6$135 Firm 2$96Firm 7$54 Firm 3$58Firm 8$78 Firm 4$23Firm 9$89 Firm 5$101Firm 10$92 Note: the answer can be found on the final slide

6 Concentration Ratios 100 90 6040 0 effective Monopoly strong Oligopolyweak Oligopolyeffectively competitive (Perfect Competition or Monopolistic Competition)

7 Concentration Ratios Industry / ProductCR 4 CR 8 Beer9093 Ammunition8994 Running Shoes7997 Tires6886 Pet Food5880 Coffee5366 Leather4967 Oil Refining2949 Milk2131 Gas Stations711 Florists23 Source: U.S. Census of Manufacturers

8 Herfindahl–Hirschman Index The Herfindahl–Hirschman Index (or HHI) attempts to measure market concentration as well but improves upon some weaknesses in the CR 4 calculation. The HHI counts the market shares of all firms, not just the top four.

9 Herfindahl–Hirschman Index

10 EXAMPLE: Calculate the HHI for the following industry: Total Revenues (in millions) Firm 1$105Firm 6$135 Firm 2$96Firm 7$54 Firm 3$58Firm 8$78 Firm 4$23Firm 9$89 Firm 5$101Firm 10$92 Note: the answer can be found on the final slide

11 Herfindahl–Hirschman Index 10,000 9,0001,8001,000 0 effective Monopoly Oligopoly somewhat competitive strongly competitive Usually in industries with an HHI over 1,000, any merger that results in a significant increase in the HHI tends to receive special scrutiny and is likely to be disallowed.

12 Herfindahl–Hirschman Index IndustryHHILargest Firms PC Operating Systems9,182Microsoft, Linux Wide-body Aircraft5,098Boeing, Airbus Diamond Mining2,338DeBeers, Alrosa, Rio Tinto Automobiles1,432GM, Ford, Toyota, Honda, Nissan Movie Distributors1,096Buena Vista, 20 th Cent. Fox, Warner Bros. Internet Providers750Comcast, AOL, Verizon, Road Runner Retail Grocers321Wal-Mart, Kroger, Sears, target, Costco

13 Slide Answers CR 4 = 52.587 HHI = 1128.72

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