Question

Suppose that a company based in Dallas, Texas, initially confronts only four other rival firms. Its own market share is 30 percent, which ties it with the other largest producer and seller in the industry. The market share of each of the other three firms is 13.33 percent. Then a sixth firm, located in Cleveland, Ohio, enters the same industry. The new firm captures 6.67percent market share, and the market share of one of the smallest three original incumbents declines to 6.67 percent as well. After the Cleveland firm's entry into the industry, what are the values of the four-firm concentration ratio and of the Herfindahl-Hirschman index? After the Cleveland firm's entry into the industry, the four-firm concentration ratio for this industry is A. 63.3 percent. B. 80.0 percent. C. 86.7 percent. D. 73.3 percent. After the Cleveland firm's entry into the industry, the value of the Herfindahl-Hirschman index is A. 1,344.4. B. 2,199.9. C. 2,244.4. D. 2,066.7.

Answer 1

(1) After entry, new 4 firm concentration ratio

= combined share of 4 largest firms

= 30 + 30 + 13.33 + 13.33 = 86.7% (c)

(2) HHI index = sum of squared shares

= 30² + 30² + 13.33² + 13.33² + 6.67² + 6.67²

= 2244.4 (c)