Measuring Market Structure

• Markets work well when firms are small relative to

the size of the market, that is, when market
concentration is “low”.

How to measure the industry concentration:

Two commonly used measures or indexes, are:

• Concentration Ratio: CRn

– the market share of the top n firms
– commonly reported as CR4 and CR8 (CR4 = 0.71
means that the biggest 4 firms in the industry have
a71% market share)
– information given by these indices is partial, it
doesn’t take into account the whole distribution of
market shares

• Herfindahl-Hirschman Index (H-index)

– for an industry with N firms, HHI = �i =1 si
N 2

where si is the market share of the ith firm.

– the HHI-index captures both the average firm size
and the inequality of size between firms
For industry A: CR4 = 70, HHI = 2698;
For industry B: CR4 = 76, HHI = 1660
• Industry A seems more concentrated. This is more
noticeable with the HHI index
• Effect of a merger: if firms 2, 3 and 4 in industry A
merge, both CR4 and HHI increase. This is a
desirable property of a concentration index.