Industry Concentration

Four-Firm Concentration Ratio

The sum of the market shares of the top four firms in the defined
industry. Letting Si denote sales for firm i and ST denote total
industry sales

Si
C4 = w1 + w2 + w3 + w4 , where w1 =
ST

Herfindahl-Hirschman Index (HHI)

The sum of the squared market shares of firms in a given industry,
multiplied by 10,000: HHI = 10,000 wi2, where wi = Si/ST.

HHI
The Herfindahl-Hirschman Index the square of
the percentage market share of each firm
summed over the largest 50 firms in the industry
(or all of the firms if there is less than 50)
In perfect competition, the HHI is small
In monopoly, the HHI is 10,000 (100 squared)
A popular measure with the Justice Dept in the 1980s

HHI < 1000 characterized competitive markets

HHI > 1800 would bring Justice Dept challenge to
proposed mergers
e.g. The cigarette industry is highly concentrated
with only 8 firms and a Herfindahl-Hirschman
Index (HH1) of 2623

CR and HHI: Candy Industry

The HHI for just the top 4 companies in the industry is
2941.81.
The CR for the industry is 78.1%.
Therefore, the industry is highly concentrated with only
a few major firms holding a majority of the market
share.
HHI = 49.5+21.6+4+3=2941.81
CR = 49.5 + 21.6 + 4 + 3= 78.1%
*Hershey and Mars Inc. alone hold 71.1% of the market share.
-Many mergers occur.

Market Definition
All Credit Lending Institutions with their own card

27.2%
19.2%
18.9%
17.2%
4.0%

J.P. Morgan Chase & Co.

Bank of America Corporation
Citigroup Inc.
American Express Company
Capital One

CR4: 83.2
HHI: 1810-1850
Total Number of Companies: 192

What is a market?
No clear consensus
The market for automobiles
Should we include light trucks; pick-ups SUVs?

The market for soft drinks

What are the competitors for Coca Cola and Pepsi?

With whom do McDonalds and Burger King compete?

Presumably define a market by closeness in

substitutability of the commodities involved
How close is close?
How homogeneous do commodities have to be?
5

Market Performance
Market structure is often a guide to market
performance
But this is not a perfect measure
Can have near competitive prices even with few
firms

Measure market performance using the

Lerner Index
LI = P-MC
P
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Lerner Index
L = (p - MC)/p = 1/|EP|
Lerner Index is bound between (0,1)
Closer to 1 the more pricing power the firm has.
Mark-up power reflects monopoly power.
PUNCHLINE: If elasticity increases, mark-up will
decline. If the product becomes less elastic,
mark-up will increase.

HHI and C4 Measure

HHI is more suitable for industries where
there are firms of different sizes.
Consider an industry of four firms with equal
share of 24% and one with 4%. C4 is 96 and
HHI is 2320.
Now consider an industry with
60+12+12+12+4=100
C4 is still 96 but HHI is 4048.

Concentration measure
Effect of concentration on industry profit is
statistically measured. It is expected that increase
in concentration increase profit. But this may not
always be the case.
Concentration of domestic manufacturers may be
high but there may be foreign import into the
market.
If two firms produce similar product and there is
no cartel, even duopoly may not give high profit.