The two concentration ratios used to measure the market power of the firm.
N-Firm Concentration Ratio
Herfindahl-Hirschman Index (HHI)
Consider the market share of the following firms:
| Firm | Revenue/Total market revenue |
| Bruce | 30% |
| Clark | 20% |
| Flash | 15% |
| Peter | 10% |
| Xavier | 10% |
| James | 5% |
Compute the following 4-firm concentration ratio and the HHI.
Solution:
\noindent Solution:
1.Prior to the merger,
Four-firm\ concentration\ ratio=30+20+15+10=75\%
Post the merger, Bruce and Clark become one entity having a market share of 50\%.
Four-firm\ concentration\ ratio=50+15+10+10=85\%
Four-firm concentration ratio fails to capture the large increase in market share of the most dominant firm which has gone up from 30\% to 50\%, while the measure has only gone up by 10\%.
2. Prior to the merger,
HHI={0.30}^2+{0.20}^2+{0.15}^2+{0.10}^2=0.1625
Post the merger,
HHI={0.50}^2+{0.15}^2+{0.10}^2+{0.10}^2=0.2925
HHI shows a larger increase, better reflecting the increase in the market share of the new large firm.
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