Question

Consider an industry that is made up of nine firms each with a market share (percent of sales) as follows: a. Firm A: 30% b. Firm B: 20% c. Firms C, D, and E: 10% each d. Firms F, G, H, and J: 5% each What is the value of the Herfindahl-Hirschman Index and how is the industry categorized?

Answer 1

Answer:

Herfindahl-Hirschman Index is 1400 and the industry is categorized as a competitive industry

Explanation:

The Herfindahl-Hirschman Index is a market indicator that is used to measure how competitive the companies or firms in an industry is. It tells whether the industry is highly competitive or monopolistic.

It is obtained by adding the square of the market share of all the firms in an industry. That is,

Herfindahl-Hirschman Index (HHI) = s1 + s2 + s3 +....... sn

(where s = market share of individual firms in an industry.)

From the question,

Herfindahl-Hirschman Index (HHI) = (30)² + (20)² + 10)² +(10)² + (10)²+ (5)²            

                                                            + (5)²+ (5)² + (5)²

                                                         = 600 + 400 + 100 +100 + 100 + 25 + 25 +

                                                            + 25 + 25

                                                         =  1400

An industry with an Herfindahl-Hirschman Index of less than 1500 units is categorized as a COMPETITIVE INDUSTRY.

One with an index of between 1500 to 2500 is considered as moderately competitive.

While an industry with higher values of HHI tends towards a monopoly.