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Chapter 11: Q 2 (page 271)

Is it true that the four-firm concentration ratio puts more emphasis on one or two very large firms, while the Herfindahl-Hirshman Index puts more emphasis on all the firms in the entire market? Explain briefly.

Short Answer

Expert verified
  • It is not true that the four-firm concentration ratio puts more emphasis on one or two very large firms.
  • It is true that Herfindahl-Hirshman Index puts more emphasis on all the firms in the entire market.

Step by step solution

01

Step 1. Definitions

  • Four- Firm Concentration Ratio -Four-firm concentration ratio is the percentage of the total sales in the industry that are accounted for by the largest four firms.
  • Herfindahl-Hirshman Index - Herfindahl-Hirshman index is the sum of the squares of the market share of each firm in the industry.
02

Step 1. Justifications

  • It is not true that the four-firm concentration ratio puts more emphasis on one or two very large firms as the four-firm ratio measures the total share of the largest four firms of the market.
  • It is true that Herfindahl-Hirshman Index puts more emphasis on all the firms in the entire market as we know from the definition Herfindahl-Hirshman Index is an approach to measure market concentration by adding the square of the market share of each firm in the industry

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