Report And Interpret The 4 Firm Concentration Ratio, The 8 Firm Concentration Ratio, And The Herfindahl Herschler Index For The Industry?


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The 4 firm concentration ratio is an economic formula. It looks at the market share of the top 4 companies in industry. It is used to calculate how much control over the market firms have and thus how much competition they have. The concentration ratio is calculated by the formula CRm=£mi=1si. The ratio calculated varies from 0% to 100%. 0% or no concentration would mean that there is no competition in that area, 0% - 50%, would mean a low concentration of competition, 50% - 80%, a medium concentration, 80% - 100% a high concentration, while 100% or total concentration would mean that the industry is saturated. Industry areas can be Oligopolistic, meaning that only a few competitors are competing over that product, or Monopolistic, meaning that one large company has almost total control over that product.
The 8 firm concentration ratio does the same job except it looks at 8 of the top companies, giving a wider and more accurate view of the market share between the companies in that area. It is better for looking at industries where there are a lot of high ranking competitors.
The Herfindahl Herschler index measures how concentrated an industrial sector is. It is also known as the concentration index. A high level of concentration would indicate a low number of competitors for that sector of industry, but a low level would mean that there are a high number of competitors. A number below 0.1 would indicate a low concentration; while anything above 0.18 shows that there is a high concentration. It is calculated by summing together the market shares squared of the firms in the industry. The index varies depending on the number of competitors in the marketplace and their respective size.

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