LINK IT UP

Visit this website (http://openstax.org/l/Google_FTC) to read an article about Google’s run-in with the FTC.

The Herfindahl-Hirschman Index

A four-firm concentration ratio is a simple tool, which may reveal only part of the story. For example, consider

two industries that both have a four-firm concentration ratio of 80. However, in one industry five firms each

control 20% of the market, while in the other industry, the top firm holds 77% of the market and all the other

firms have 1% each. Although the four-firm concentration ratios are identical, it would be reasonable to worry

more about the extent of competition in the second case—where the largest firm is nearly a monopoly—than in

the first.

Another approach to measuring industry concentration that can distinguish between these two cases is called

the Herfindahl-Hirschman Index (HHI). We calculate HHI by summing the squares of the market share of
each firm in the industry, as the following Work It Out shows.
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