4 Market concentration

4.1 Concentration measures

• Vague measure: the number of firms in the industry.

• Why the need for a more precise measure?

— Comparisons between different industries/countries

— Antitrust legislation

• If more than one firm, concentration is determined by two different

factors:

1. The number of firms in the industry

2. The distribution of output (market shares) among the firms in the
industry


• If qi is output by firm i, and Q := N i=1 qi is total output, the market
share of firm i is given by
qi
si := .
Q

4.1.1 The four-firm concentration ratio

• This concentration measure is given as the sum of the market shares of

the 4 largest firms in the industry

• If we order firms according to market shares, so that

s1 ≥ s2 ≥ s3 ≥ ... ≥ sN ,

the four-firm concentration ratio is given by

4

I4 := si .
i=1

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4.1.2 The Herfindahl-Hirshman index

• This concentration measure is given by the sum of the squares of the

market shares of all firms in the industry:

N

IHH := (si )2 .
i=1

• Unlike the 4-firm concentration ration, the Herfindahl-Hirshman index

is sensitive to unequal market shares.

• The Herfindahl-Hirshman index is generally found to be the preferred

concentration measure.

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