Merger guidelines developed by the U.S.Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index as a measure of concentration.This index measures concentration in an industry by
A)adding up the market shares of all firms in the industry, squaring this number and then dividing by the number of firms in the industry.
B)squaring the market shares of each firm in an industry and then adding up the values of the squares.
C)squaring the four-firm concentration ratio of the industry and dividing this number by the total number of firms in the industry.
D)determining the market shares of the four largest firms in the industry, but unlike the concentration ratio, the Index includes sales in the United States by foreign firms.

Question

Quizplus · Accepted Answer

The Herfindahl-Hirschman Index (HHI) measures concentration in an industry by summing the squares of the market shares of all firms in an industry. Therefore, choice B, which describes this method, is the correct answer. Choice A describes a simpler measure called the concentration ratio, which sums the market shares of only the top firms in an industry. Choice C is partially correct but incomplete because it only squares the four-firm concentration ratio, which is a subset of the total market shares. Choice D is incorrect because it only considers the market shares of the top four firms, rather than all firms in the industry.

Merger Guidelines Developed by the U