Measuring
Market Concentration
Slide Contents
• This set of slides covers the basics of:
– Concentration Ratios
– Herfindahl–Hirschman Index
Concentration Ratios
• Concentration Ratios attempt to measure
market concentration since “a few firms” isn’t
precisely defined. In reality, that may range
from two or ten or more.
• A four-firm concentration ratio (CR4) is defined
as the percentage of sales accounted for by
the largest four firms.
Concentration Ratios
𝑇𝑅 𝑜𝑓 4 𝐿𝑎𝑟𝑔𝑒𝑠𝑡 𝐹𝑖𝑟𝑚𝑠
𝐶𝑅4 =
∙ 100
𝑇𝑅 𝑜𝑓 𝐴𝑙𝑙 𝐹𝑖𝑟𝑚𝑠
𝑇𝑅 𝑜𝑓 8 𝐿𝑎𝑟𝑔𝑒𝑠𝑡 𝐹𝑖𝑟𝑚𝑠
𝐶𝑅8 =
∙ 100
𝑇𝑅 𝑜𝑓 𝐴𝑙𝑙 𝐹𝑖𝑟𝑚𝑠
𝑇𝑅 𝑜𝑓 20 𝐿𝑎𝑟𝑔𝑒𝑠𝑡 𝐹𝑖𝑟𝑚𝑠
𝐶𝑅20 =
∙ 100
𝑇𝑅 𝑜𝑓 𝐴𝑙𝑙 𝐹𝑖𝑟𝑚𝑠
Concentration Ratios
0
40
60
90
100
Concentration Ratios
Industry / Product
CR4
CR8
Beer
90
93
Ammunition
89
94
Running Shoes
79
97
Tires
68
86
Pet Food
58
80
Coffee
53
66
Leather
49
67
Oil Refining
29
49
Milk
21
31
Gas Stations
7
11
Florists
2
3
Source: U.S. Census of Manufacturers
Concentration Ratios
• EXAMPLE:
Calculate the CR4 for the following industry:
Total Revenues
(in millions)
Total Revenues
(in millions)
Firm 1
$105
Firm 6
$135
Firm 2
$96
Firm 7
$54
Firm 3
$58
Firm 8
$78
Firm 4
$23
Firm 9
$89
Firm 5
$101
Firm 10
$92
Note: the answer can be found on the final slide
Herfindahl–Hirschman Index
• The Herfindahl–Hirschman Index (or HHI)
attempts to measure market concentration as
well but improves upon some weaknesses in
the CR4 calculation.
• The HHI counts the market shares of all firms,
not just the top four.
Herfindahl–Hirschman Index
𝑛
𝑠𝑖2
𝐻𝐻𝐼 =
𝑖=1
where s is the percent market share of each firm
Or think of it as the following equation
𝐻𝐻𝐼 = 𝑠12 + 𝑠22 + ⋯ + 𝑠𝑛2
Herfindahl–Hirschman Index
0
1,000
1,800
9,000
10,000
• Usually in industries with an HHI over 1,000, any merger that results in a significant
increase in the HHI tends to receive special scrutiny and is likely to be disallowed.
Herfindahl–Hirschman Index
Industry
HHI
Largest Firms
PC Operating Systems
9,182
Microsoft, Linux
Wide-body Aircraft
5,098
Boeing, Airbus
Diamond Mining
2,338
DeBeers, Alrosa, Rio Tinto
Automobiles
1,432
GM, Ford, Toyota, Honda, Nissan
Movie Distributors
1,096
Buena Vista, 20th Cent. Fox, Warner Bros.
Internet Providers
750
Comcast, AOL, Verizon, Road Runner
Retail Grocers
321
Wal-Mart, Kroger, Sears, target, Costco
Herfindahl–Hirschman Index
• EXAMPLE:
Calculate the HHI for the following industry:
Total Revenues
(in millions)
Total Revenues
(in millions)
Firm 1
$105
Firm 6
$135
Firm 2
$96
Firm 7
$54
Firm 3
$58
Firm 8
$78
Firm 4
$23
Firm 9
$89
Firm 5
$101
Firm 10
$92
Note: the answer can be found on the final slide
Slide Answers
• CR4 = 52.587
• HHI = 1128.72