Industry A has four firms, each with a 25% market share while industry B has four firms, one firm with a 70% market share and the other three firms with 10% each. According to the Herfindahl-Hirschman Index, industry A is more highly concentrated.

Question

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The Herfindahl-Hirschman Index takes into account not only the number of firms in an industry, but also their respective market shares. In industry A, each firm has equal market share, resulting in an HHI of 2500 (25 squared times four). In industry B, the largest firm has a market share of 70%, resulting in an HHI of 4900 (70 squared plus three times 10 squared). Therefore, industry B is more highly concentrated according to the HHI.

Industry a Has Four Firms, Each with a 25% Market