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

• 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

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.

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