One of the most commonly used measures of industry concentration is the Herfindahl-Herschman Index (HHI). There are two other measures of concentration: the Rosenbluth-Hall-Tideman Index (RHT) and the Hannah-Kay Index (HKI). The RHT is a measure of the number of firms that are in the same industry. It is a better measure than the HHI in that it takes into account the degree of competition between the firms, while the HHI is based on market shares of firms and is less precise.
Eight-firm concentration ratio
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The eight-firm concentration ratio, also called CR8 or EC8 is a measure of industry concentration. It is computed using market shares of the industry’s largest eight firms. Concentration is a measure of market competition and explains how well the largest firms are able to compete.
Although some industries are more concentrated than others, the number of firms in an industry may not necessarily be related to the competitiveness of the industry. For example, the UK supermarket industry is dominated by four major firms: Tesco, Asda, Morrisons, and Sainsbury’s. These four firms account for about 40% of the industry’s sales.
Generally, a high concentration ratio indicates that there is little competition in an industry. This means that new firms must face a higher degree of difficulty entering the industry. However, there is no concrete evidence supporting this concern. In fact, many firms now face increased competition because of the proliferation of new communications and information technology.
Another measurement of industry concentration is the Herfindal-Hirschman Index. This index is similar to the four-firm concentration ratio, but the number of firms is squared to provide a more accurate picture of the level of competition in an industry.
Other simple concentration ratios are the three-firm and five-firm CR. They are calculated by multiplying the percentage of total sales by the market share of the largest three or five firms in the industry.
Concentration ratios range from 0% to 100%. The lower the concentration ratio, the more competitive the industry is. Conversely, a concentration ratio that exceeds 100% is a sign of oligopoly. Industry concentration is not a perfect metric, but it does help economists determine how monopolistic or oligopolistic an industry is.
Concentration of firms is often dependent on the product or service being offered. If the industry has a large share of foreign imports, the competition could be fierce. On the other hand, if there are only a few firms in the industry, the amount of competition is low.
Although there is no specific definition of the four-firm concentration ratio, the concentration of firms in an industry can be influenced by country and product. For example, the telecom industry in India is a very highly concentrated industry, while the ready-mix concrete industry is unconcentrated.
Herfindahl-Herschman Index (HHI)
The Herfindahl-Hirschman Index (HHI) is a metric used to measure the level of concentration in a particular industry. It is often used to evaluate mergers. A HHI value above one hundred thousand is a strong indicator that the market is highly concentrated, whereas a value below one hundred thousand is a strong indication that the market is not highly concentrated.
In addition to the Herfindahl-Hirschman index, several other concentration metrics have been proposed. These include the concentration ratio, the concentration index, the n-firm concentration ratio, and the n-firm market share concentration ratio. While these measures provide some insight into the concentration of a market, they lack the fundamental foundations of economic theory. Some critics argue that these measures “measure without theory” and fail to account for complexities of the market.
The Herfindahl-Hirschman ratio, or HHI, is the most commonly used measure of market concentration. It is based on the assumption that a market is more competitive if there are more competitors. This is because the revenue of each firm is sensitive to its pricing strategy.
When a market has a large number of firms of similar size, the HHI will be close to zero. On the other hand, when there are a significant number of firms of different sizes, the HHI will be close to one.
The n-firm concentration ratio is another widely used concentration measure. It is calculated by summing the squares of individual firm market shares. When each firm has an equal market share, the resulting number will equal n. However, when a large number of firms have differing market shares, the resulting HHI will be higher than n.
The n-firm concentration ratio uses real market share data to analyze an industry. This method is useful when the total number of market participants is small. But it fails to account for complexities of the market and does not reflect competition. For example, if a market is dominated by the firm Philips, then the Herfindahl-Hirschman (HHI) index would be two thousand and eight hundred.
Rosenbluth-Hall-Tideman Index
The Rosenbluth-Hall-Tideman index, or HHI, is a statistical measure that summarizes industry concentration. Using a relatively small amount of data, it can reveal the relative dispersion of firms in an industry.
A HHI value of less than 100 indicates that an industry is highly concentrated. In contrast, a high value means that an industry is monopolistic. Economists use this metric as a criterion to rank the order distributions of the shares of total capacity held by firms in an industry. It can be used to assess Concentration Risk and to identify a monopolistic or oligopolistic market structure.
The index’s most important attribute is that it does not require extensive data. Moreover, the HHI is probabilistic, which shields it from the charge of being an unscientific calculation.
However, it is not the only concentration index on the market. Other concentration metrics include the standardized Gini’s concentration coefficient (or standardized Gini’s concentration ratio), the Linda Index, the U-index, the Hannah and Kay index, and the Herfindahl-Hirschman Index. Despite their varying uses, each index has one thing in common.
While the standardized Gini’s concentration coefficient is a commonly used metric, other concentration metrics may be better suited to the task. For instance, researchers may prefer the Linda Index to the other concentration indices because it has little empirical evidence of regulatory usage.
The Herfindahl-Hirschman index is another measure of industry concentration. It was developed in the late 1940s by Orris C. Herfindahl to measure concentration in the US steel industry. His method was based on a variation of the Hirschman metric, but his approach had ecological and economic antecedents.
Choosing the right concentration metric is a task for empirical economists. There are many alternatives, and it is best to investigate each one carefully to decide which is most appropriate.
Some concentration metrics, such as the HHI, do not accurately reflect competitive conditions. Others, such as the U-index and the standardized Gini’s concentration coefficient, do not measure the quantity that is most important.
However, the Herfindahl-Hirschman, the standardized Gini’s concentration coefficient, and the U-index are all excellent concentration metrics, though they may not be the best for your research.
Hannah&Kay Index
The Hannah-Kay Index (HHI) is used to measure industry concentration. It is a reciprocal row vector of size one-by-m. It is defined as the sum of the market share squares of the largest firms in a market.
HHI has a tendency to become increasingly dominant in the field of concentration measurement. However, it is not as robust as CK. A sensitivity problem exists with the HHI. If a smaller market share is assigned, then changes in the value of the index do not reflect the change in the distribution of market shares. Hence, there is a need for an alternative index.
CK is another new concentration index. It was proposed by Oscar Bajo and Rafael Salas. This index has some properties that other indices do not. For example, it shares properties with other indices, but it has a value-validity property.
A new index, called CK, has a functional relationship with the HHI index. Unlike the HHI, CK is also a valid index, meaning that comparisons between index values are not misleading. Compared with the HHI, CK also has a value-validity property, and is equally sensitive to changes in the distribution of market shares throughout its range of values.
Concentration indices can also be parameterized. In other words, they can be dependent on an arbitrary parameter a. Thus, they can be different for different data sets. One important property of a concentration index is that it should be sensitive to changes in Pn. Another property is that it should not be biased toward uneven distributions.
Moreover, a concentration index should be able to measure deconcentration. In other words, a concentration index should be able determine the degree of competition in a given market. Deconcentration is not present in all industries. Therefore, the C8 family of indices was proposed as an alternative to the C6 and C7 indices.
These are the criteria that the concentration index needs to meet in order to be a valid measure. The resulting numerical values must be true representations of the market concentration.
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