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|
Compute the following 4-firm concentration ratio and the HHI.
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,
Post the merger,
HHI shows a larger increase, better reflecting the increase in the market share of the new large firm.