Suppose that a small town has seven burger shops whose respective shares of the

Question

Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 23%, 22%, 18%, 12%, 11%, 8%, and 6%. Instructions: Enter your answers as whole numbers. a. What is the four-firm concentration ratio of the hamburger industry in this town? b. What is the Herfindahl index for the hamburger industry in this town? c. If the top three sellers combined to form a single firm, what would happen to the four-firm concentration ratio and to the Herfindahl index? Four-firm concentration ratio Herfindahl index

Explanation / Answer

(a) C4 = 23% + 22% + 18% + 12% = 75%

(b) HHI = (23)2 + (22)2 + (18)2 + (12)2 + (11)2 + (8)2 + (6)2 = 529 + 484 + 324 + 144 + 121 + 64 + 36 = 1,702

(c) In this case, market shares will be: (23 + 22 + 18)% (or 63%), 12%, 11%, 8%, 6%.

C4 = (63 + 12 + 11 + 8)% = 94%

HHI = (63)2 + (12)2 + (11)2 + (8)2 + (6)2 = 3,969 + 144 + 121 + 64 + 36 = 4,334

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