The data below are the firm revenue shares for three different industries. Indus

Question

The data below are the firm revenue shares for three different industries.

Industry A revenue shares: 30%, 25%, 25%, 15%, 5%.

Industry B revenue shares: 45%, 35%, 10%, 7.5%, 2.5%

Industry C revenue shares: 20%, 18%, 15%, 12%, 10%, 10%, 7.5%, 7.5%

a. Calculate the four-firm concentration ratio and Herfindahl indexes for each of the three industries. you must show your work.

b. Based on your findings in part a, which of the three industries is the most concentrated? Which of the three industries is the least concentrated? Explain in 1-2 sentences how you arrived at your answer.

Explanation / Answer

(a)

Industry A:

Four-firm concentration ratio = 30% +25% + 25% + 15% = 95%

HHI Index = (0.30)2 + (0.25)2 + (0.25)2 + (0.15)2 + (0.05)2 = 0.24

Industry B:

Four-firm concentration ratio = 45% +35% + 10% + 7.5% = 97.5%

HHI Index = (0.45)2 + (0.35)2 + (0.10)2 + (0.075)2 + (0.025)2 = 0.341

Industry C:

Four-firm concentration ratio = 20% +18% + 15% + 12% = 65%

HHI Index = (0.20)2 + (0.18)2 + (0.15)2 + (0.12)2 + (0.10)2 + (0.10)2 + (0.075)2 + (0.075)2 = 0.14

(b) Industry B is most concentrated because the Four-firm concentration ratio for industry B is highest among the thee industries. And industry C is least concentrated because the Four-firm concentration ratio for industry C is lowest among the thee industries.

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