The attached table represents the market share of the top eight firms in a hypothetical industry in and Calculate the four-firm concentration ratios for and Analyze the industry changes during this five-year period. Calculate the eight-firm concentration ratios for and
Unless you have a monopoly, your company's sales comprise only a portion of the market's total sales. Dividing your sales by the total sales of the industry during the same period of time will tell you what your company's market share was for that time.
To better understand the competitive environment that your company is operating in, you will need to look at the market shares held by your competitors. Learning how many firms control the market will tell you about the nature of competition in that market.
Concentration ratios are the measurements used to describe and analyze the percentage of market share held by the top firms. Census Bureau's economic census calculates the concentration ratios for the top four, eight, 20 and 50 firms in various industries. The concentration ratio of a market can fall anywhere on the range from zero to If the data provided by these concentration ratios is not sufficiently granular to describe your market, you can look to the slightly more complex Herfindahl-Hirschman Index for further clarity.
Herfindahl-Hirschman Index The eponymously named Herfindahl-Hirschman Index takes the concentration ratio a step further to show how concentrated a market is at the top. Merely by looking at the concentration ratio of the top four firms in a market, you would not be able to tell if there is one giant firm and three minor firms, or if each of the top four firms hold equal market shares.
The HHI is calculated by summing the squared market shares of the top firms. By squaring each firms share, the size differences between large and small firms is magnified and revealed. Interpreting Data Low concentration ratios for example, when the top four firms hold less than 20 percent of the market are found in markets where many firms vigorously compete.
High concentration ratios for example, the top four firms control more than 80 percent of the market indicate that a few firms are cornering the market.
Looking at the HHI, you gain further clarity into the level of competition.
If there is a monopoly, then the HHI would be 10, market share iswhich is squared. If there was a cartel of four firms with equal shares, the HHI would be lower: The lower the HHI, the less concentrated the market is at the top.
Strategy After learning about your market, you might want to act to change your market share, perhaps through mergers and acquisitions. Please note that if your company is not a monopolistic price setter, or a perfectly competitive price taker, your business will be strategically dependent on the behavior of each of your rivals.
Economists study such multiperson decision problems in the field of game theory. Public policymakers who are interested in protecting consumers and competition keep an eye on market concentration information. Your ability to navigate the conflicts and opportunities that arise may be tempered by antitrust regulations and laws.
Nevertheless, understanding the concentration ratios of firms in your market will provide you the big picture perspective you will need. Perloff; Resources 1 U. He has been published in the "Journal of Business, Entrepreneurship and the Law.The four firm concentration ratio is the percentage of the value of total sales accounted for by the four largest firms in an industry.
In more general terms, it is the market share of the four largest firms .
Industry B has a four-firm concentration ratio of percent and Herfindahl-Hirschman index of A representative firm has a Lerner index of and Rothschild index of c.
Industry C has a four-firm concentration ratio of percent and HerfindahlHirschman index of 10, Suppose that the distribution of sales within an industry is as shown in the table. Firm Share of Total Market Sales.
A (2 marks) Compute the N-firm Concentration Ratio, CR(N), for N=1, 2, 3, and 4 for the Australian residential mortgage market in (2 marks) Show that the Herfindahl Index for the Australian residential mortgage market in is between 7% and %.
The UK definition of an oligopoly is a five-firm concentration ratio of more than 50% (this means the five biggest firms have more than 50% of the total market share) The above industry (UK petrol) is an example of an oligopoly.
The four-firm concentration ratio is the sum of total sales or the top four firms (OmniCola, Juice-Up, Super Soda, and King Caffeine) divided by the industry total.
These four firms account for $1, million worth of soft drink sales, which is percent of the overall market.