Definition: The four firm concentration ratio is the percentage of market share held by the largest 4 firms in an industry.
Formula: CR4= Σ4i=1 si
Calculation: (11,834,883 + 3,845,900 + 3,696,800 + 3,650,647) / 44,582,621 = 0.5165292996 = 0.516 (3dp) =51%
Analysis: As the four firm concentration ratio is >50% this insinuates that this market structure is that of an oligopoly.
Calculating the Herfindahl-Hirschman Index (HHI)
Definition: The HHI is a concentration measure based on the sum of the squared market shares of all the firms in the industry.
Calculation: 0.1085 (4dp)
Analysis: Using HHI analysis, we have found the HHI is between 100 and 1500, resulting in it being an unconcentrated market
Lorenz Curve and Gini Coefficient
Calculation: G = (458069882/0.5*197*44582621) – 1 = -0.89569 (0.89 2DP)
Advantages and Disadvantages of the measures of Concentration
Narrowing down the market by using an ‘n’ number of firms as a measure of industry concentration is helpful for measuring concentration in extreme cases like monopoly and perfect competition. White (1981) argues that in the case of concentration within individual markets, we search for inferences in relation to the likelihood of oligopolistic coordination concerning prices and sales. The shares of the oligopoly’s themselves will be a prime determinant of the likelihood of that co-ordination, Hence, industry sales are the proper measure of concentration calculations in individual industries.
Using CR4 means that analysis of the whole industry is based on these select four, meaning it cannot capture information and performance in the rest of the industry. No account is taken of the number and size distribution of firms that are outside the top ‘n’. Furthermore, no account is taken of the size distribution