7. Identification of Market Structure
g. describe the use and limitations of concentration measures in identifying market structure;
h. identify the type of market structure within which a firm operates.
What is N-firm concentration ratio and what is it for?
N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry. The ratio is used as an indicator of the relative size of firms in relation to the industry as a whole.
What is the Herfindahl-Hirschman Index (HHI)?
- The Herfindahl-Hirschman index is the sum of the squared market shares of the top N largest firms in the industry.
- $$H = M_1^2 + M_2^2 + M_3^2 + ... + M_N^2$$
What are the advantages of the Herfindahl-Hirschman Index (HHI)?
The advantages of the Herfindahl index are that it reflects more firms in the industry and it gives greater weight to the companies with larger market shares.