Question

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

No, the four-firm concentration ratio does not emphasize on one or two large firms, whereas the Herfindahl-Hirshman index places greater emphasis on all firms in the market.

Step-by-step solution

Definition

Four-firm concentration ratio is the first technique created to determine the degree of monopoly. It calculates the combined market share of the major companies.

Market concentration is measured using the Herfindahl - Hirschman Index (HHI). It displays the competitiveness of the various industries. The HHI is determined by adding the market share squares together.

Explanation

The four-firm concentration ratio emphasizes one or two very large companies, whereas the Herfindahl-Hirshman Index emphasizes all of the companies in the market. The claim is untrue. The HHI considers all firms' market shares in its calculations, although the squaring of market shares makes the impact of the largest enterprises appear to be greater than in the $4$-firm ratio.