Homework SourseSuppose that a small town has seven burger shops whose respe
Suppose that a small town has seven burger shops whose respective shares of the local hamburger market are (as percentages of all hamburgers sold): 27%, 26%, 21%, 12%, 8%, 4%, and 2%. Instructions: Enter your answers as whole numbers. a. What is the four-firm concentration ratio of the hamburger industry in this town? b. What is the Herfindahl index for the hamburger industry in this town? c. If the top three sellers combined to form a single firm, what would happen to the four-firm concentration ratio and to the Herfindahl index?
Solution
(a) Four-firm concentration ratio is the total market share of the four largest firms in the market. In this case of seven burger shops, the four largest firms according to market share have market share % as 27, 26, 21 and 12; hence Four-firm concentration ratio is 27+26+21+12= 86
(b) The Herfindahl index is the sum of the squares of the market shares for each firm within the industry.
HHI = (27)2+(26)2+(21)2+(12)2+(8)2 +(4)2 +(2)2 = 2074
(c) If top 3 sellers combine to form a single firm, then the new market share percentages would be:
74%, 12%, 8%, 4%, 2%
In this case Four-firm concentration ratio is 74+12+8+4= 98
HHI = (74)2+(12)2+(8)2 +(4)2 +(2)2 = 5704
