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“Way to measure concentration in the market is a her fondled hirschman index or hh. Hh. I the her her friend l. Hirshman index is calculated by the formula.
The rundell hirshman index is equal to the size of firm once market size squared. Plus firm two s market size squared. Plus. Firm ends market size squared where n.
Is the number of firms in the market. The market size is given either as a decimal fraction or as a percentage. If the decimal fraction is used in the hirshman index over point 18 is considered to be highly. Concentrated if a percentage is used the hirshman index is over 1800.
Is considered to be highly concentrated the hhi index below point 0 1. Or if the percentage is used 100. Then the market is considered to be highly competitive. A hhi index below point 10 or 1000.
If a percentage is used then the market size is considered to be. Unconcentrated if the hhi is between 02. And point 18 or the percentage uses between 1000. And 1800.
Then the market is considered to have moderate market. Concentration a hhi above 8 point 18 or above 1800 of her percentages use then the market is considered to be have a high market concentration first square the market size or multiply. The market size times. It sells sell either in absolute terms or percentage terms of all the firms in the market.
Some of the squares. Compare the result with the index numbers provided by her from dell and hirshman. Let s see how the her from dell hershman index is calculated let s calculate the her friend l. Hirshman.
Fx. Using a percent of market share. If an entrant suppose an industry has four firms in from a b c. And d.
From a has 38 percent of the market share from b. Has 25 percent of the market share from c. Has 20 percent of the market share and firm d. Has 17 percent of the market share.
Now. Let s calculate the her from dell hirshman index first write down the formula for the her from dell hirschman index since there are four firms in the example. The formula will be the market share of firm. A squared plus.
The market share of firm b. Squared. Plus. The market share.
Our firm c. Squared. Plus. The market share of firm d.
Squared. Next substitute. In 38 4. From ace market share into the formula next substitute in 25 for firm b.
s market share next substitute in 20 for firm. Sees market share into the formula and finally substitute in 17 for firm ds market share into the formula next each of the numbers will need to be squared squaring means that the number will be multiplied times itself for example. 38 will be multiplied by 38 multiplying. 30.
Times 38 or scoring. 38. Gives 1004. 40.
For multiplying 25 times. 25. Or squaring. 25.
Gives. 625. Multiplying. 20.
Times. 20 or squaring. 20. Gives 400 multiplying 17 times 17 or squaring.
17. Gives 289 next. We re going to add the results of the squaring together so adding 1444 to 625. Gives.
2069. Adding. 2069 adding 2069 to 400 gives 2469. Finally adding to 2469 to 289 gives 27.
Our tooth 2758. Once the index has been calculated. It will need to be interpreted as you may remember the her frontal hirshman index is interpreted using the following criteria. If the hhi is below 1 100.
Or. If the percentages use 100. The market is considered to be highly. Competitive if the hhi is below 1 10 or 1000.
That the percentage is used and the market is considered to be unconcentrated. If the hhi is between 110th and 1800 s or if a percentage is used between 1000 and 1800. Then the market is considered to have moderate concentration. If the hhi is above 1800s or if the percentages used 1800s.
Then the market is considered to have a high market concentration. Now let s compare the calculated value with the criteria for the different levels of the concentration set down by her friend l. And hirschman is 2758 less than or below 100. No is 2758 less than 1000.
No so let s move down to the next criteria. Next. Is 2007 158 between 1000. And 1800.
No. So let s move down to the next criteria. Next is 2758 greater than or above 1800. Yes.
Since 27. 2758 is greater than 18. This indicates a high level of market concentration since two thousand seven hundred fifty is greater than eighteen eighteen 1800. There s a high market concentration in this market.
Let s recalculate. The here friend l. Hershman. Index using decimals instead of the market share let s look at calculating the her frontal hirshman index using decimal fraction.
Fractions representing market share. Let s look at an example of the her friend. Dale hirshman. Index calculated using the decimal representation of the market share firm.
A controls. 38 hundredths of the market from b. Controls. 25.
Hundredths of the market from c. Controls two tenths of the market and firm d controls. 17. Hundredths of the market.
So the first step is to write down the formula for the hirshman her friend. Dale hirshman index since there are four firms in this example. The formula. The market share our firm a squared plus.
The market share of firm b. Squared. Plus. The market share from c.
Squared. Plus. The market share or firm. D screen will be used let s substitute in the values for each of these market.
Shares. 38 hundredths is substituted in for firm a s market share 25 hundredths are substituted in for b s market share two tenths is substituted in for firm c s market share and 1700s are substituted in for firm ds market share now let s square each of these market shares multiplying. 38. Hundreds times.
38 hundredths or squaring thirty eight hundredths gives zero point one four four four or 1444. Ten thousand let s multiply 25 hundredths times. Twenty five hundredths or square twenty five hundredths. Giving 625.
Ten thousandths. Let s multiply two tenths times two tenths or square two tenths giving four hundredths multiply 17. Hundredths times 1700s or squaring 1700s. Giving two hundred two hundred and eighty nine thousand ten thousandths next.
Let s add the squares of each of the firm s market share together first add 1444 ten thousandths to 625. Ten thousandths. Which gives 2069. Ten thousandths add to hunt and two four hundredths.
Which gives 2464. Ten thousand next add two thousand sixty four sixty nine ten thousand to two hundred and eighty nine ten thousandths. Which gives us two thousand seven hundred and fifty eight ten thousand as you may remember the hurdle. Hirshman index has the following interpretation and hhi below 1 100.
Then the market is considered to be highly competitive and hhh. I below one tenth. Then the market is considered to be unconcentrated and hhi between one tenth and 1800. Then the market is considered to have moderate market market concentration and hha above 1800s.
Then the market is said to have a high market concentration. Let s now compare the calculated. Her friend l. Hirsch.
In index 2758. Ten thousands to the criteria set down by her friend l. And hirshman is mm is two thousand seven hundred and fifty eight ten thousandths less or below 1 100. No is two thousand seven hundred and fifty eight ten thousandths less than 1 10.
No is two thousand seven hundred and fifty eight ten thousandths between 1 10. And 1800 s no is two thousand seven hundred and fifty eight ten thousandths above 1800s yes. This indicates that there is a high level of market concentration in this particular industry since. 27 or.
2758. 10000th is greater than 1800s. There is a high market. ” .
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