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The four-firm concentration ratio

Regulators have struggled for decades to measure the degree of monopoly power in an industry. An early tool was the concentration ratio    , which measures what share of the total sales in the industry are accounted for by the largest firms, typically the top four to eight firms. For an explanation of how high market concentrations can create inefficiencies in an economy, refer to Monopoly .

Say that the market for replacing broken automobile windshields in a certain city has 18 firms with the market shares shown in [link] , where the market share    is each firm’s proportion of total sales in that market. The four-firm concentration ratio is calculated by adding the market shares of the four largest firms: in this case, 16 + 10 + 8 + 6 = 40. This concentration ratio would not be considered especially high, because the largest four firms have less than half the market.

Calculating concentration ratios from market shares
If the market shares in the market for replacing automobile windshields are:
Smooth as Glass Repair Company 16% of the market
The Auto Glass Doctor Company 10% of the market
Your Car Shield Company 8% of the market
Seven firms that each have 6% of the market 42% of the market, combined
Eight firms that each have 3% of the market 24% of the market, combined
Then the four-firm concentration ratio is 16 + 10 + 8 + 6 = 40.

The concentration ratio approach can help to clarify some of the fuzziness over deciding when a merger might affect competition. For instance, if two of the smallest firms in the hypothetical market for repairing automobile windshields merged, the four-firm concentration ratio would not change—which implies that there is not much worry that the degree of competition in the market has notably diminished. However, if the top two firms merged, then the four-firm concentration ratio would become 46 (that is, 26 + 8 + 6 + 6). While this concentration ratio is modestly higher, the four-firm concentration ratio would still be less than half, so such a proposed merger might barely raise an eyebrow among antitrust regulators.

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The herfindahl-hirshman index

A four-firm concentration ratio is a simple tool, which may reveal only part of the story. For example, consider two industries that both have a four-firm concentration ratio of 80. However, in one industry five firms each control 20% of the market, while in the other industry, the top firm holds 77% of the market and all the other firms have 1% each. Although the four-firm concentration ratios are identical, it would be reasonable to worry more about the extent of competition in the second case—where the largest firm is nearly a monopoly—than in the first.

Another approach to measuring industry concentration that can distinguish between these two cases is called the Herfindahl-Hirschman Index (HHI)    . The HHI, as it is often called, is calculated by summing the squares of the market share of each firm in the industry, as the following Work it Out shows.

Questions & Answers

what economics is all about?
Nomuhle Reply
what is a new paradigm shift
Austen Reply
Paradigm shift it is the reconcilliation of fedural goods in production
Shyline
factors that affecting economic system
Bemen Reply
crux
Shyline
what is microeconomics
Nkanyiso Reply
what is the main problem in our economy
Nkanyiso
crux
Austen
what does crux mean
Shyline
what is demand
Jervis Reply
what are the factors of demand
Jervis
What is money and banking
Dorcas Reply
which one of the bank do product money
Dorcas
central bank
Mohamed
no .... all bank its self...
Buayadarat_Gaming
commercial banking
Mohamed
different types of products banking are .... 1 bills of exchange, 2 leasing, 3 project finance and so on
Mohamed
Demand and supply
Jervis
money can be defined as a medium of exchange
Jervis
how third party insurance premium is calculated?
Eshetu Reply
why scarcity is a problem in economics.
AYAABA Reply
don't worry about it, it's everywhere b/c no resources are full off in the world, b/c geometric increase of population growth.
Eshetu
okay
Shyline
price elasticity of demand is a percentage change in quantity demanded/percentage change in price.
Fadiga Reply
what is the formula for elasticity
Favy Reply
please be specific. Is it elasticity of demand or supply
Moses
we do not have a specific formulae for elasticity but we do have formulae for the types of elasticity and these are the types.Namely price elasticity of demand,Income elasticity of demand and cross elasticity of demand. please be a specific with your question.
Fadiga
sorry elasticity of Demand
Favy
The elasticity of demand is the change in demand due to the change in one or more of the variable factors that it depends on. ... The responsiveness of the quantity demanded to the change in income is called Income elasticity of demand while that to the price is called Price elasticity of demand.
ushindi
price-elasticity-demand-formula Price elasticity of demand = % change in Q.D. / % change in Price
ushindi
what is socialist economics
andy Reply
socialist economics is diffined as the reduction in production possibility curve where as production possibility curve frontial is when it shows the reduction in business and it will also lead to ceteris paribus
Shyline
Socialist economy, is a system of government, in which the means of product is in the hands of the government
Blessing
Change in quantity supplied
Haja Reply
what happened when there is a decrease in investment ?
simeon
what is a minimum wage?
Emelyn
Haja: Change in Quantity Supplied mostly is associated with the supply curve and changes in pricing strategy in response to the changes in market conditions. May in which context are you asking it?
AmarbirSingh
Simeon: When there is a decrease in the amount invested then the amount of funding available is less and the level of production is low leading to less amount of goods and services available for consumption in the economy. Increases on the other hand will lead to development if managed properly.
AmarbirSingh
Otherwise, lead to Bankruptcy
AmarbirSingh
Emelyn: Minimum Wage: This is the minimum sum of money that should be paid to employees across the country to be able to afford a life-style where they can pay their bills on time and have food on the table, roof over their heads and money to travel and commute to and from one place.
AmarbirSingh
Thank you so much, AmarbirSingh Sandhu..
Emelyn
Career Progression and getting your investments right leads to wealth Generation and Management and Transfer.
AmarbirSingh
Emelyn: Your Welcome.
AmarbirSingh
assalam aleykum,I would like to ask if the world has not security what would happen?
Abdoulkarim
how can we define marginal cost I mean I used TC devided Q but teacher said it is not true
Ixtiyor
could you give me exact formula
Ixtiyor
extra
Iyabo
meaning
Iyabo
Emelyn this is the definition of minimum wages. Minimum wage is a least legal wage fixed above the equilibrium(market) wage by the legislative authorities below which it is illegal to employ labour in the labour market.
Fadiga
Two indifference curves cannot cut each other because:
Bilal Reply
because it shows that the business will go down or it will lose profit
Shyline
differentiate between normative statement and positive statement
Nkanyiso
What is scarcity
Ohemaa Reply
What is elasticity
Ohemaa
Elasticity is a tool in economics to Measure the Fluctuations in product price and the Quantity of products and services being sold.
AmarbirSingh
In business and economics, elasticity refers to the degree to which individuals, consumers, or producers change their demand or the amount supplied in response to price or income changes. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service's
AmarbirSingh
Scarcity is the shortage of raw materials in the economy due to inefficient management and incompetent leadership of xyz authority leading to production and supply issues in correlation to the demand of those products, services and commodities available.
AmarbirSingh
Hope that answers the questions
AmarbirSingh
Have a great day ahead
AmarbirSingh
OK..
Emelyn
Scarcity it is the production of goods in economics
Shyline
Scarcity is not the production of goods in economics.
MARTIN
okay
Shyline
what are the factors that causes change in demand?
Nomuhle Reply
competition for one
Kudzie
okay thanks
Nomuhle
competition for one
Kudzie
Double coincidence of one
Shyline
These are the factors that cause change in demand. (1) Taste and fashion (2)income of the consumer (3)price of related commodities (4)size of the population. (5) weather conditions can also cause change in demand.
Fadiga

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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