Economic Assignment

Report
Indian Tyre Industry
INTRODUCTION
The Indian Tyre Industry is an integral part of the Auto Sector – It
contributes to ~3% of the manufacturing GDP of India and ~0.5% of the
total GDP directly. So, let’s understand the dynamics of the Tyre Industry
in India.

Indian tyre industry has almost doubled from ~Rs 30,000 crores in 2010-
11 to ~Rs 59,500 crores in 2017-18 of which 90-95% came from the
domestic markets. The top three companies – MRF, Apollo Tyres and JK
Tyres have ~60% of the market share in terms of revenue. In terms of
segmentation tyres can be divided in two ways – based on end market
and based on product. Indian tyre market is clearly skewed towards the
replacement segment which contributes ~70% of total revenues.
Whereas in volume (tonnage) terms the replacement segment
contributes ~60% indicating realizations in the after-market are clearly
higher than OEMs (Original Equipment Manufacturer) market

METHODOLOGY
i) Scope

To calculate the Herfindahl-Hirschman Index (HHI) which is a common

measure of market concentration and is used to determine market
competitiveness.

ii) Purpose

The use of HHI Index using the 20 companies in a particular industry to

determine if that industry should be considered competitive or as close to
being a monopoly.
What Is Concentration Ratio?

The concentration ratio, in economics, is a ratio that indicates the size of

firms in relation to their industry as a whole. Low concentration ratio in
an industry would indicate greater competition among the firms in that
industry, compared to one with a ratio nearing 100%, which would be
evident in an industry characterized by a true monopoly.

Formula
The concentration ratio is calculated as follows: CRn  = C1  + C2  + ... + Cn
Where:
Cn defines the market share of the nth largest firm in an industry as a
percentage of total industry market share
n defines the number of firms included in the concentration ratio
calculation

Concentration levels
Concentration ratios range from 0%–100%. Concentration levels are explained as
follows: 

Between these two extremes, concentration ratios can fall into low, medium,
and high concentration.

 Low Concentration: A concentration ratio of 0 to 50 Concentration Levels

percent is commonly interpreted as an industry with low
concentration. Monopolistic competition falls into the Level Ratio
bottom of this with oligopoly emerging near the upper
end. High 80% to 100%
Medium 50% to 80%
Low 0% to 50%

 Medium Concentration: A concentration ratio of 50 to 80

percent is considered an industry with medium concentration. These industries
are very much oligopoly.

 High Concentration: An industry with a concentration ratio of 80 to 100 percent

is viewed as highly concentrated. Government regulators are usually most
concerned with industries falling into this category.
The Herfindahl Hirschman Index
The Herfindahl Hirschman Index (HHI) is a measurement used to
understand the level of competition that exists within a market or
industry, as well as give an indication of how the distribution of market
share occurs across the companies included in the index.  Understanding
the level of market competition can be important for strategic planning as
well as when trying to establish pricing for a company’s products or
services market share value which places a higher importance on those top
companies that have a larger market share.

Formula

where si is the market share of firm i in the market, and N is the

number of firms. Thus, in a market with two firms that each have 50
percent market share, the Herfindahl index equals 0.502+0.502 = 1/2.
The Herfindahl Index (H) ranges from 1/N to one, where N is the
number of firms in the market. Equivalently, if percents are used as
whole numbers, as in 75 instead of 0.75, the index can range up to
1002, or 10,000.

 An H below 0.01 (or 100) indicates a highly competitive industry.

  An H below 0.15 (or 1,500) indicates an unconcentrated industry.
 An H between 0.15 to 0.25 (or 1,500 to 2,500) indicates moderate
concentration.
An H above 0.25 (above 2,500) indicates high concentration.

A small index indicates a competitive industry with no dominant

players. If all firms have an equal share the reciprocal of the index
shows the number of firms in the industry. When firms have unequal
shares, the reciprocal of the index indicates the "equivalent" number of
firms in the industry.

How Does the Herfindahl-Hirschman Index Work?

The closer a market is to a monopoly, the higher the market's

concentration (and the lower its competition). If, for example, there were
only one firm in an industry, that firm would have 100% market share,
and the Herfindahl-Hirschman Index (HHI) would equal 10,000, indicating
a monopoly. If there were thousands of firms competing, each would
have nearly 0% market share, and the HHI would be close to zero,
indicating nearly perfect competition.

The U.S. Department of Justice considers a market with an HHI of less

than 1,500 to be a competitive marketplace, an HHI of 1,500 to 2,500 to
be a moderately concentrated marketplace, and an HHI of 2,500 or
greater to be a highly concentrated marketplace. As a general rule,
mergers that increase the HHI by more than 200 points in highly
concentrated markets raise antitrust concerns, as they are assumed to
enhance market power under section 5.3 of the Horizontal Merger
Guidelines jointly issued by the department and the Federal Trade
Commission (FTC).1

The primary advantage of the Herfindahl-Hirschman Index (HHI) is the

simplicity of the calculation necessary to determine it and the small
amount of data required for the calculation. The primary disadvantage of
the HHI stems from the fact that it is such a simple measure that it fails
to take into account the complexities of various markets in a way that
allows for a genuinely accurate assessment of competitive or monopolistic
market conditions.
Calculations

We have collected sales data of 3 years period of Tyres Companies

in India (2016-2018).

Calculated Industrial Sales

The Four Firms Associated:

Year Apollo J K Tyre

M R F Ltd. Tyres & Inds. Ceat Ltd. SUM C4
Ltd. Ltd.
2016 147429.9 98366.9 65678.9 63765.2 375241 0.69337
2107 153720.1 104383 65785 63819.1 387707 0.7164
2018 159147.5 121498 76133.5 68313 425092 0.78548
Four Firm Calculations

Four Firm Calculation= C1+C2+C3+C4

Total no. of sales

Where c denotes the company sales

Total Industrial Sales: 541185.2

Year 2016

147429.9 + 98366.9 + 65678.9 + 63765.2

= 375241 = 0.69337 = 69.337%

541185.2

Year 2017

153720.1 + 104383 + 65785 + 63819.1

= 387707 = 0.7164 = 71.64%

541185.2

Year 2018

159147.5 + 121498 + 76133.5 + 68313

= 425092 = 0.78548 = 78.548%

541185.2
 HHI Calculations

The sum of squaring the sales of all the companies sales resulted as
follows:

Year 2016 2578.5

Year 2017 3037.06

Year 2018 3414.48

ANALYSIS

Four Firm Calculations Analysis

In the Indian Tyre Industry, we have considered 25 companies from

which we have taken 4 firms to calculate 4 Firm calculations Ratio for the
year 2016-2018

These Industries are:

M R F Ltd.

Apollo Tyres Ltd.

J K Tyre & Inds. Ltd.

Ceat Ltd.

As per the above calculations and concentration levels mentioned, these represent the
medium concentration in an industry and these consider under an oligopoly industry.
A rule of thumb is that an oligopoly exists when the top five firms in the market
account for more than 60% of total market sales.
 0.80 C4
CONCENTRATION RATIO 0.78 0.79
0.76
0.74
0.72
0.72
0.70
0.68 0.69

0.66
0.64
1 2 3
year

These ratio that indicates the size of firms in relation to their industry as a whole.

An oligopoly is apparent when the top five firms in the market account for more than
60% of total market sales, according to the concentration ratio.

This indicates the degree of competition in the India Tyre industry which follows
oligopolistic market structure.

HHI Calculation Analysis

In the Indian Tyre Industry, we have considered Sales of 25 companies

and total Industrial sales.It is accepted measure of market concentration. 

The HHI is calculated by squaring the market share of each firm

competing in the market and then summing the resulting numbers.

HHI

3 3414.48

2 3037.07
YEAR

1 2578.58

0.00 500.00 1000.00 1500.00 2000.00 2500.00 3000.00 3500.00 4000.00

HHI
As per the above calculations and HHI Index, the companies in Indian
Tyre Industry which comes under an HHI of 2,500 or greater to be a
highly concentrated marketplace. It measures the extent of domination of
sales by one or more firms in a particular market. 

Conclusion
Four Firm Calculations

According to the calculation denotes that the Four largest firms in the industry
accounts for 69, 72,78 percentage of total industry output in year 2016,17,18
respectively

A concentration ratio of 50 to 80 percent is considered an industry with

medium concentration. These industries are very much oligopoly.

HHI Calculations

As per the HHI Index (refer Methodology)

The derived output is

Year 2016 2578.5

Year 2017 3037.06

Year 2018 3414.48

which comes under an HHI of 2,500 or greater to be a highly

concentrated in marketplace.

Hence, the companies of given Tyre Industry are highly concentrated in

the market.

MRF, Apollo Tyres and JK Tyres currently represent the top

players in this market.
Reference
Guidance from Faculty Member– B Sai Sailaja Madam

Prowessiq (company sales data)

Submitted By
1. Nivedita Roy
2. Haripriya Kompella
3. Satyam Bharadwaj
4. Aditya Vikram Bung
5. M Surya Vamsi
6. Vishal Kumar