Consider an industry that is made up of nine firms each with a market share (percent of sales)as follows:
A.Firm A: 30%
B.Firm B: 20%
C.Firms C, D, and E: 10% each
D.Firms F, G, H, and J: 5% each
What is the value of the Herfindahl-Hirschman Index?
A)1,425
B)1,600
C)1,700
D)2,600

Question

Quizplus · Accepted Answer

To calculate the Herfindahl-Hirschman Index (HHI), we need to square the market shares of each firm, and then sum up the squared values. 
HHI = (0.3)^2 + (0.2)^2 + (0.1)^2 + (0.1)^2 + (0.1)^2 + (0.05)^2 + (0.05)^2 + (0.05)^2 + (0.05)^2 
HHI = 0.09 + 0.04 + 0.01 + 0.01 + 0.01 + 0.0025 + 0.0025 + 0.0025 + 0.0025 
HHI = 0.1625 
HHI x 10,000 = 1,625 
Since the HHI is between 1,500 and 2,500, this industry is considered to be moderately concentrated. Therefore, the best choice is C.

Consider an Industry That Is Made Up of Nine Firms