Question

Does either the four-firm concentration ratio or the HHI directly measure the amount of competition in an industry? Why or why not?

Short answer

HHI is a superior metric for assessing the industry's rivalry.

Step-by-step solution

Step1. Introduction

Market concentration is measured using the Herfindahl - Hirschman Index (HHI) and the four firm concentration ratio.

Step2. Explanation

The Herfindahl-Hirschman index (HHI) is calculated by summing the squares of each firm's market share.$\mathrm{HHI}=\mathrm{S}{1}^2+\mathrm{S}{2}^2+\mathrm{S}{3}^2+\mathrm{S}{4}^2+\dots \dots \dots +{\mathrm{Sn}}^2$is the market share of each firm, where localid="1646327220233" $\mathrm{S}$is the market share of each business.

The HHI scale runs from localid="1646327344176" $0$to $10,000$. If it is $0$, the market is extremely competitive, i.e. ideal competition, and if it is$10,000$, the market is highly concentrated, implying the existence of a monopolistic structure.

The Four Firm Concentration (FFC) Ratio is the sum of the market share percentages of the four largest enterprises. A high score indicates that competition is restricted to these four major corporations.

HHI is a superior metric than FFC since it covers all businesses and evaluates the whole industry, whereas the latter only includes four significant enterprises.