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Industry competitiveness using Herfindahl and entropy concentration indices

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Article in Applied Economics · September 2010

DOI: 10.1080/00036840801964666 · Source: RePEc

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Industry competitiveness using Herfindahl and entropy concentration

indices with firm market capitalization data
David Nawrockia; William Carterb
a
School of Business, Villanova University, Villanova, PA 19085, USA b The QInsight Group, San
Diego, CA, USA

First published on: 03 August 2010

To cite this Article Nawrocki, David and Carter, William(2010) 'Industry competitiveness using Herfindahl and
entropy concentration indices with firm market capitalization data', Applied Economics, 42: 22, 2855 — 2863, First
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 Applied Economics, 2010, 42, 2855–2863

Industry competitiveness using

Herfindahl and entropy
concentration indices with
firm market capitalization
data
David Nawrockia,* and William Carterb
a
School of Business, Villanova University, Villanova, PA 19085, USA
b
The QInsight Group, San Diego, CA, USA
Downloaded By: [Nawrocki, David] At: 03:12 4 August 2010

While previous studies of industry concentration have traditionally utilized

sales or market share data, no studies that we are aware of have been done
with market capitalization data. If the markets are successful at valuing
a firm’s current and future prospects, it can be argued that concentration
indices and other metrics based on the market value of the firms in an
industry should be a good proxy for market power within an industry. This
study presents a study of the market concentration using the Herfindahl and
entropy concentration indices for 13 industries.

I. Introduction
This article received its start when the new Standard
and Poors eight-digit GIC industry classification
codes were introduced in January 2001. As part of
a project to generate 125 new survival bias-free
industry indices, an extensive database of market
capitalization values grouped by industry classifica-
tions going back to 1971 was developed. As no
previous study (that we are aware of) of industry
concentration has utilized market capitalization data,
an opportunity for an interesting research project
presented itself.
We argue that if the financial markets are
successful at valuing a firm’s prospects, then market
capitalization of firms within an industry is a good
proxy for computing market concentration measures
within an industry. This approach has two inherent
weaknesses: (1) it requires that firms’ debt to equity
ratios1 have no effect on the market concentration of
an industry; in other words, all firms within an
industry have the same leverage ratio, and therefore,
have no effect on the use of market capitalization
values as proxies for market concentration and (2) it
only includes firms that are publicly traded.
Even with these limitations, the improvement in the
quality of data by using market capitalization data
over the problematic use of market share and sales
data should provide interesting results. The remain-
der of this article is organized as follows: Section II
discusses the type of data used previously in industry
concentration studies. Section III presents an over-
view of the industry concentration measures used
within the academic literature. Empirical results are
reported in Section IV. Finally, conclusions are
provided in Section V.
II. The Data
The best test for the existence of monopoly power
within an industry is to acquire and analyse cost and

*Corresponding author. E-mail: David.Nawrocki@villanova.edu

1
Future research can explore the use of enterprise value instead of market capitalization.

Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online © 2010 Taylor & Francis 2855
http://www.informaworld.com
Applied Economics, 2010, 42, 2855–2863
DOI: 10.1080/00036840801964666
 2856
demand data for firms within an industry. Although
these data have been studied (Dickson, 1994), Curry
and George (1983) note that these data are very
difficult to analyse effectively. Even when cost and
demand data are obtainable, Dickson (1994) notes
that it has to be adjusted carefully for firm size. As
a result of this poor data availability, researchers
have attempted to use sales and market share data
that has also proven difficult to obtain (Kelly, 1981;
Weinstock, 1982). Another problem is that Curry and
George (1983) argue that sales data will favour
distribution firms over manufacturing firms. They
suggest that an alternative is to use only the size of
a firm’s assets, but that approach can be misleading
due to dependence on accounting conventions.
Market capitalization data avoids the problem of
dependence on accounting conventions and is fairly
easy to obtain from the University of Chicago Center
for Research in Security Prices (CRSP) dataset. 2 The
only problem is whether market capitalization data
Downloaded By: [Nawrocki, David] At: 03:12 4 August 2010
are a fair proxy for firm size because they ignore debt
information. However, because any additional firm
value or loss of firm value due to monopolistic
behaviour (or through economies of large-scale
operation) will accrue to the shareholders rather
than bondholders, this assumption should be a
reasonable one.
This brings us to an important issue raised by
Gale and Branch (1982) who asked whether the
profitability of an industry results from economies
of scale due to larger market shares or whether it
is due to oligopolistic behaviour within the industry.
Utilizing business unit data (that is no longer
available), they concluded that market share was
more important than industry concentration in
determining profitability. They conclude that anti-
trust policies may reduce market efficiency.
Woodrow (1990) adds support to this view by finding
that increases in labour productivity (scale efficiency)
can increase industry concentration. We cannot
add to this debate because we cannot separate out
the market share and industry concentration effect
without the business unit data. However, we can
point out that the four-firm concentration ratios
used in the Gale and Branch study are inferior to
other concentration ratios (see discussion given
further).
This article provides an additional measure of
market power concentration and reminds the profes-
sion that equity risk and return measures have not
been used in these studies since Melicher et al. (1976)
D. Nawrocki and W.
Carter
used the Sharpe, Treynor and Jensen performance
measures in their study.
Industry indices and market capitalization values
were calculated for 13 industries (using the eight-
digit Global Industry Classification (GIC) sub-
industry classifications introduced in 2001) using
daily and monthly data from the CRSP dataset from
January 1971 to December 2001. These data provide
another advantage over sales and market share data
by being available on a daily and monthly basis.
III. Concentration and
Competition Measures
The use of different measures of concentration or
competition within an industry is also subject to
debate. Kowka (1985) states that no single concen-
tration measure can capture everything happening
within an industry. A thorough economic analysis of
an industry is sure to uncover much that is missed
by a single index number. Curry and George (1983)
opine that no single concentration measure is best
because of the complexity of business life. They
recommend that a number of measures need to be
tried because the measures will be dependent on the
particular industry. Accordingly, this study utilizes a
number of measures and provides another approach
to the problem of analysing industry concentration.
This approach is exemplified by Nissan and Caveny
(1993) who used six different measures to find that
there was an increase in industry concentration in the
US in the 1980s.
The traditional measure that has been published by
census departments is the n-firm concentration ratio.
However, numerous authors have demonstrated the
superiority of the Hirschman–Herfindahl index
(commonly called the Herfindahl index) over the n-
firm concentration ratios (Weinstock, 1982; Curry
and George, 1983; Michelini and Pickford, 1985;
Sleuwaegen and Dehandschutter, 1986; Cortes,
1998), with one dissenting vote (Kowka, 1985). The
Herfindahl Index (HI) is computed as the sum of
the squared firm proportions within an industry (s)
and will vary between 0 and 1.
HI ¼ Σs2 ð1Þ
where Σs ¼1.0. The HI is an index of concentration
within an industry. A high number is indicative of a
high degree of concentration or monopoly power and
2
CRSP has had data accuracy problems with delisting
codes and values used to compute survivor bias free
industry indexes (Shumway, 1997). Recently, CRSP has
spent a great deal of time correcting these problems. Even
so, CRSP data have to be watched carefully for problems,
especially with recent data.
 Industry competitiveness using Herfindahl and entropy concentration
indices
a low number indicative of a high degree of
competition.
Another measure described by Horowitz and
Horowitz (1968) is the entropy measure of competi-
tion. In information theory and the physical sciences,
entropy is a measure of the degree of disorder or
uncertainty of a system. Let s be the probability of a
discrete event, the entropy H is given by:
H ¼ —Σs ln s ð2Þ
Maximum entropy is reached when each prob-
ability of each discrete event is equal, or s¼ 1/n where
n is the number of events. The entropy of a
communication source provides a model for measur-
ing the ‘competitiveness’ of an industry. If entropy is
used as a measure of the degree of competitiveness,
then s is the firm’s proportional market value within
the industry and the higher the entropy value the
higher the degree of competitiveness.
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The maximum entropy of a process also provides
useful information when it is used in a relative
entropy formulation:
H reader. The results are displayed for eight of
R¼ ð3Þ
ln n
where ln n is equal to maximum entropy. Relative
entropy (given that the number of firms within an
industry is finite) proposes to measure the degree to
which competition is approaching its maximum
potential as a limit. H measures the degree of
competition within an industry. R measures how
competitive an industry is relative to how competitive
it could be (Horowitz and Horowitz, 1968). The
entropy measures have found acceptance within the
economics literature as a measure of competition
(Jacquemin and Berry, 1979; Curry and George,
1983; Attaran and Saghafi, 1988). The HI is
subtracted from 1 in order to convert it to a
competition measure that can be compared to the
entropy measure, or:
HIC ¼ 1 — HI ð4Þ
While these measures of competition have been
useful in many studies, researchers have noted that
the HI and R measures are sensitive to the number of
firms in an industry (Davies, 1980; Curry and
George, 1983). As a result, Kelly (1981) and White
(1982) have suggested that a numbers equivalent be
used to improve the performance of the HI (and
subsequently the entropy measures). Fortunately, an
2857
equivalent number of firms’ calculation is available
from information theory.
E ¼ eH ð5Þ
where E is the number of equal size firms that would
result in the same amount of entropy H. The
equivalent number of equal size firms (E) can be
used to compare the degree of competition in one
industry with that in another industry or to compare
the degree of competition at one period of time with
that at another.
Finally, the SD and the semi-deviation (downside
risk measure) are utilized to track changes in the
equity risk within an industry.3
IV. The Empirical Results
Armed with these measures of competitiveness, the
degree of competitiveness is explored for 13 indus-
tries. The industries were selected on the basis of our
perception of their degree of possible interest to the
the industries in Figs 1–8 and for all 13 industries
in Table 1.
Table 1 reports the results of simple linear regres-
sions between industry returns and variability with
the entropy concentration index as the independent
variable. These regressions were motivated by the
fact that we are not aware of any studies that compare
shareholder returns to measures of industry competi-
tiveness, since Melicher et al. (1976). They find that
Sharpe, Treynor and Jensen measures did not
improve with reductions in competitiveness. They
did find an improvement when market/book ratios
were utilized.
First, industry returns and SDs are regressed
against the entropy concentration measure. While
the regression coefficients are significant, the R2s
are not for the industry returns. For the SDs,
seven of
13 industries had R2s ranging from 0.0335 to
0.1842. For six of the 13 industries, the regression
coefficients for industry returns were significantly
positive (Telecom, Computers, Money Center
Banks, Airlines, Retail and Oil and Gas) indicating
that industry returns increased with increasing
concentration and decreased with decreasing
concentration. The other seven industries had
significantly negative coefficients indicating that
industry returns increased with decreasing concentra-
tion and decreased with increasing concentration.
3
See Nawrocki (1999) for a survey of semi-variance and
downside risk measures.
 2858 D. Nawrocki and W.
Carter
(a) Entropy and Herfindahl industry concentration indices for software(b)
Software industry  number of companies

No. of companies
% Concentration

No. of companies in industry

Equivalent no. of companies

Time (r = 0.3870) Time

Fig. 1. System and application software industry

Notes: (Microsoft goes public in March 1986.) Concentration Indices represent low concentration at 100% and high
concentration at 0%. Correlations are between the entropy and Herfindahl measures.

(a)
Telecommunications  diversified (AT&T) (b) Telecommunications (AT&T)  equivalent and total
number of companies
Concentration index
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No. of companies

Equivalent no. of companies

Time
Time (r = 0.9907)

Fig. 2. Telecommunications

Still the R2s are very low, thus supporting the view of
were estimated for each company:
Attaran and Saghafi (1988) who found little
evidence of any relationship between the mean CRt ¼ α þ þEt þ "t ð6Þ
return and SD of assets and the entropy asset
CRt ¼ α þ þRt þ "t ð7Þ
concentration index.
One interesting idea to test is whether the largest CSt ¼ α þ þRt þ "t ð8Þ
firm within an industry benefits from a reduction
in competitiveness. Therefore, the largest firm was CSVt ¼ α þ þRt þ "t ð9Þ
selected within each industry and conditional return,
where CRt is the conditional return for the largest
conditional SD and conditional semivariance
company in the industry, CSt is the conditional
measures were computed by subtracting the industry
monthly SD for the company, CSVt is the
return from the company return for each data
conditional monthly semi-variance for the
observation. Monthly returns were utilized from the
company, Et is the equivalent number of companies
monthly CRSP dataset. The daily CRSP dataset was
in the industry (Equation 5), and Rt is the relative
utilized to compute monthly SDs and semi-variances
entropy concen- tration measure for the industry
for both the industry indices and the individual
(Equation 3).
companies.
A positive regression coefficient with the entropy
In Table 1, the conditional statistics for the largest
regression Equations 7, 8, 9 indicates that as com-
company in the industry are regressed using the
petition increases (entropy increases), the conditional
entropy or equivalent number of firms as the
return or variability of the firm increases. A negative
independent variable.4 The following regressions
regression coefficient indicates that as competition
increases, the conditional return or variability of the
4
See Whitelaw (1994) for a description of the methodology for computing conditional returns and the monthly SD and semi-
deviation statistics.
 Industry competitiveness using Herfindahl and entropy concentration 2859
indices
(a) (b) Equivalent number of companies
Computers and peripherals and the number of companies

Concentration index

No. of companies

Equivalent no. of companies

Time (r = 0.9735)
Time

Fig. 3. Computers: manufacturing and peripherals

(includes IBM)

(a)
M E
o q
Concentration index

n u
e i
y v
Downloaded By: [Nawrocki, David] At: 03:12 4 August 2010

a
C l
e e
n n
t t
e
r n
u
B m
a b
n e
k r
s
a
n
d

n
u
m
b
e
r
T
i o
m f
e

c
(
o
r
m
p
= a
n
0 i
. e
2 s
4
9
1
No. of companies
)

Equivalent no. of companies

Time

Fig. 4. Money Center Banks (Citigroup)

Industry competitiveness using Herfindahl and entropy concentration 2859
indices
(a) (b)
Equivalent number and number of companies
Beverages
Concentration index

No. of companies

Equivalent no. of companies

Time (r = 0.9266)

Fig. 5. Alcoholic beverages (Anheuser Busch)

(a) Multi-line retail (Wal-Mart) (b)

Equivalent number and number of companies
Concentration index

No. of companies

Equivalent no. of companies

Time (r = 0.9070)

Fig. 6. Multi-line retail

 2860
(a) Multi-utilities (Enron, Dynegy)
Concentration index
Time (r = 0.9799)
Fig. 7. Multi-utilities (includes Enron and Dynegy)
(a) Oil and gas
Concentration index
Downloaded By: [Nawrocki, David] At: 03:12 4 August 2010
Time (r = 0.8020)
Fig. 8. Integrated oil and gas (Exxon-Mobil)
firm decreases. With the equivalent number of firms
regression Equation 6, a positive (negative) coeffi-
cient indicates that as the number of firms decrease,
the return of the firm decreases (increases). If the
relationship is insignificant, the competitiveness of
the industry has no effect on the company. The most
likely explanation is that the company is not large
enough to derive any marginal changes from changes
in the competitiveness of the industry. Another
explanation is that the industry competition is
stable enough that no competition effect is noted.
First, we will take an in-depth look at Microsoft
and the software industry and then we will
summarize the other industry results. The results in
Fig. 1, Table 1 and Table 2 for Microsoft are
interesting. In Fig. 1, the entropy measure indicates
that the software industry was pretty competitive
before Microsoft started trading publicly in March
1986. The HI is also steadily improving during this
period indicating increasing competitiveness. After
Microsoft went public, both indices started a long
decline. The number of firms in the industry increase
throughout the period but the equivalent number of
firms peaks in early 1986 and starts to decline
thereafter. Although the R2s are low, the industry
5
Generally, the Durbin–Watson statistics indicates no autocorrelation in all of the regressions reported in this study.
D. Nawrocki and W.
Carter
(b)
Utilities (Enron)  equivalent number and number of companies
No. of companies
Equivalent no. of companies
Time
(b) Integrated oil (Exxon-Mobil)  equivalent number and number of companies
No. of companies
Equivalent no. of companies
Time
regressions indicate that as the industry com-
petitiveness declines, the industry return and risk
are increasing. The company regressions for
Microsoft indicate that as competitiveness (entropy)
declined, Microsoft’s return and variance increased.
However, if only downside risk (semi-variance) is
studied, Microsoft’s downside risk declined as the
competitiveness of the industry declined. This latter
result is very interesting as it indicates Microsoft
reduced its risk as it grew to dominate the industry.
In addition, the R2 for the semi-deviation regression
is almost four times higher than the R2 for the
SD regression.
Table 2 provides more detailed results for
Microsoft. First, autocorrelation (missing variables)
is not a problem as evidenced by the Durbin–Watson
statistics.5 The equivalent number of companies is
highly correlated with the entropy and Herfindahl
measures but the overall number of companies is not.
Therefore, the overall number of companies variable
is used in the following regressions,
CRt ¼ α þ þ1Rt þ þ2Nt þ "t ð10Þ
CRt ¼ α þ þ1HICt þ þ2Nt þ "t ð11Þ
 Industry competitiveness using Herfindahl and entropy concentration 2861
indices
Table 1. Simple linear regressions for company conditional statistics against entropy and equivalent number of companies

(6) (7) (8) (9)

Company Company Company Company
Industry Industry conditional conditional conditional conditional
Industry return SD return return SD semi-var.
Company f(entropy) f(entropy) f(# Comp.) f(entropy) f(entropy) f(entropy)
Software Coef. —0.0255* —0.0850* 0.0010* —2.3862* 0.1565* 0.1230*
Microsoft R2 0.0013 —0.1006 0.0274 0.4454 0.1476 0.5603
Telcomm Coef. 0.0087* —0.0272* —0.0505* 0.0062 0.2576* 0.1684*
AT&T R2 0.0015 0.0177 —0.5739 0.0008 0.6730 0.5616
Communication equipment Coef. —0.0235* —0.1892* 0.0016* 0.0330* —0.2828* —0.2978*
Nortel R2 0.0004 0.0920 0.0077 0.0005 0.0871 0.2717
Computers Coef. 0.0324* —0.0170* 0.1884* 0.0004 0.3252* 0.2169*
IBM R2 0.0036 0.0031 0.7393 0.0000 0.4744 0.4124
Semiconductor equipment Coef. —0.0439* —0.0806* —0.0002 0.0023 —0.1252* 0.0858*
Applied Mat R2 0.0009 —0.0335 0.0001 0.0009 0.0343 0.0316
Money Center Banks Coef. 0.0372* —0.0253* —0.0026* 0.0026* 1.1367* 0.3453*
Citigroup R2 0.0004 0.0354 —0.0087 0.0009 0.2735 0.2735
Financials Coef. —0.0555* 0.0162* 0.0014 0.0465* 0.1424* 0.0331*
AMBAC Fin. R2 0.0121 0.1842 0.0016 0.0094 0.1403 0.0457
Downloaded By: [Nawrocki, David] At: 03:12 4 August 2010

Airlines Coef. 0.0159* —0.0635 —0.0837* 0.0039 —0.7260* 0.4582*

AMR R2 0.0001 0.0054 —0.8992 0.0001 0.3015 0.2347
Beverages Coef. —0.0151* 0.0109* —0.0004 —0.4871* —0.3047* 0.3047*
Anheuser Busch R2 0.0016 0.0017 —0.0005 0.0845 0.5835 0.2223
Retail Coef. 0.0550* —0.1162* 0.0027* 0.0379* —0.0446* 0.0272*
Wal-Mart R2 0.0095 0.1246 0.0061 0.0051 —0.0078 0.0056
Utilities Coef. —0.0496* —0.1883* —0.0942* —0.0367* —0.0576* 0.0440*
Enron R2 0.0037 —0.0912 0.9282 0.0006 0.0036 0.0041
Oil and gas Coef. 0.0557* —0.0704* —0.1019* —0.0298* —1.0519* 0.6782*
Exxon-Mobil R2 0.0013 0.0031 —0.9685 0.0014 0.2972 0.2414
Drugs Coef. —0.0275* 0.0096* —0.0591* —0.0383* —0.5502* 0.3566*
Pfizer R2 0.0018 0.0004 —0.9718 0.0052 0.5247 0.4307

Note: * denotes significance at 1% level.

R Microsoft’s risk-return performance, the relation-

¼ α þ þ1 R t þ þ2 N t þ " t
V ships between the entropy competition measure and
t
¼ α þ þ 1 R t þ þ2 N t þ " t ð13Þ
R decrease in the industry competition measures was
SVt
where CR is the conditional return for Microsoft, R is
the relative entropy, HIC is the relative Herfindahl
Index, N is the number of companies in the industry,
R/V is the Sharpe reward to variability ratio,
(CR — Rf)/S and R/SV is the reward to semi-
variability ratio, (CR —Rf)/SD. S is the standard
deviation of Microsoft, SD is the semi-deviation
(square root of the semivariance) and Rf is the risk-
free rate of return.
As the number of companies is generally
increasing throughout the period, we see the positive
relation- ship between Microsoft’s conditional
return and the number of companies. As expected,
we see the negative relationship between
Microsoft’s return and the industry competition
indices. Looking at
ð12Þ
Microsoft’s reward to variability and reward to semi-
variability ratios are strongly negative. Clearly, the
beneficial to Microsoft’s return, risk-return and
downside risk performances.
Figures 2 and 3 provide a view into two industries
that were dominated by one firm in the 1970s and
then became more competitive starting in the 1980s.
The two companies are AT&T and IBM. The graphs
indicate that the concentration indices start to
increase in the 1980s especially after the breakup of
AT&T. The regression results indicate that both
companies had a reduction in their conditional
returns with the increase in the equivalent number
of companies. While their returns were not affected
by the increase in competition, both companies saw
an increase in their risk as the competition in their
industries increased.
 2862 D. Nawrocki and W.
Carter
Table 2. Detailed regressions for Microsoft and software industry (1987:02–2001:12)

Number of Durbin–
Dependent Entropy Herfindahl companies Adjusted R2 Watson Equation
Conditional —1.5887 (—14.38) 0.4202 (6.10) 0.5477 2.1243 10
return
Conditional —2.0684 (—14.80) 0.3490 (5.21) 0.5617 1.9244 11
return
MSFT R/SV —27.7178 (—11.60) 7.6688 (5.14) 0.4415 2.0087 12
ratio
MSFT R/V —14.3658 (—13.73) 3.5283 (5.40) 0.5211 2.0027 13
ratio

Correlation matrix
Equivalent
Number of number of
Entropy Herfindahl companies companies

Entropy 1.0000
Herfindahl 0.9358 1.0000
Number of 0.2015 0.1296 1.0000
companies
Equivalent 0.9343 0.8326 0.5108 1.0000
Downloaded By: [Nawrocki, David] At: 03:12 4 August 2010

number of
companies
Notes: MSFT R/SV ratio – Monthly reward to semi-variability ratio for Microsoft. MSFT R/V ratio – Monthly reward to
variability ratio for Microsoft. t-statistics are in parentheses.

In Fig. 4, the Money Center Banks show a long-
term decline in competitiveness and number of
companies. Alcoholic beverages (Fig. 5) demonstrate
that a long-term decline in competitiveness can be
reversed as the competition ratios and the number of
firms increase starting in 1997. General retail (Fig. 6)
also presents a picture of declining competitiveness/
increasing concentration since the 1980s.
Multi-line utilities (Fig. 7) is very interesting
because of the Enron effect. The competition indices
and the equivalent number of companies start to
decrease in 1998, which is probably a result of the
technology bubble inflating Enron’s market capitali-
zation. After the Enron bankruptcy in 2001, all of the
indices increase. Enron’s fraudulent market capitali-
zation significantly biased these indices during this
period.
Finally, Oil and Gas (Fig. 8) also exhibits a long-
term decline in competition even with an increase in
the number of firms in the late 1990s.
In the regressions in Table 1, Nortel (Communica-
tions Equipment), AMR (Airlines), Anheuser Busch
(Alcoholic beverages), Exxon-Mobil (Oil and Gas)
and Pfizer (Drugs) are found to have strong negative
relationships between their risk measures and the
entropy concentration measure, i.e. increases in
competition lead to decreases in the risk of the firm.
AT&T and IBM show positive relationships between
risk and competitiveness, i.e. increase in competition
leads to increases in risk. Citigroup shows a positive
relationship between SD and competition but a
negative relationship between semi-variance and
com- petition, i.e. downside risk increased as
competition increases. Applied materials
(Semiconductor equip- ment), Wal-Mart (Retail) and
Enron (Multi-utilities) have very weak negative
relationships between risk and competitiveness
while AMBAC Financial (Financials) has a weak
positive relationship.
In terms of conditional returns, only Microsoft has
a significant relationship between conditional return
and competitiveness. The rest of the companies’
conditional returns are not affected by the competi-
tiveness of the industry. The equivalent number of
companies has a significantly negative effect on
conditional returns of AT&T, IBM, AMR, Enron,
Exxon-Mobil and Pfizer. Microsoft, Nortel, Applied
Materials, Citigroup, AMBAC Financial, Anheuser
Busch and Wal-Mart do not see their conditional
returns affected by the number of firms.
V. Summary and Conclusions
Using market capitalization data obtained from a
project on industry indices provides an interesting
look into the competitiveness of 13 different indus-
tries. Competitiveness or concentration measures
were computed using firm market value rather than
 Industry competitiveness using Herfindahl and entropy concentration
indices Dickson, V. (1994) Aggregate industry cost functions and
market shares, sales or cost and demand functions.
The Herfindahl, entropy, relative entropy and
equivalent number of firm measures were computed
for the period 1971 to 2001. Regressions between the
largest firm in the industry and the competitive-
ness measures indicate that whenever competition
declines, it has a positive effect on the firm’s
return conditioned on the industry returns (nine of
13 industries). However, most firms see their risk
relative to the industry increase as competitiveness
declines (nine of 13 industries). It should be noted
that results differ from industry to industry indicating
the wisdom of the Curry and George approach
(1983). Microsoft is the only company to benefit
significantly from a reduction in competitiveness in
its industry. AT&T and IBM saw significant
reductions in their risk/return performance after their
industries became more competitive in the 1980s.
Future research would include using the HI in the
regressions and running more regressions with
Downloaded By: [Nawrocki, David] At: 03:12 4 August 2010
the equivalent number of firms. In addition, both
the entropy and relative entropy measures would be
utilized. Furthermore, conditional risk and return
variables using macrovariable regressions could be
attempted.
Another interesting study would be cross-sectional
regressions over time looking at relationship between
industry risk and return and the industry competi-
tiveness indices.
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