But, lower the index is, more competitive the market becomes. The index may rise as high as 10,000 if the market has a monopoly. For example in a market consisting of only five firms with shares of 30%, 30%, 20%,20% and 20%, the Herfindahl Index would be 3000 (900 + 900+ 400+ 400+400).

This index is calculated by adding the square root of the percentage market share of each individual firm in the industry. The most common measure to calculate the market concentration is the Herfindahl-Hirschman Index (HHI). On the other hand, if the concentration is high, it means that top ‘n’ firms influence the production or services provided in the market the industry then is said to be oligopolistic or monopolistic. If the concentration is low, it simply means that top ‘n’ firms are not influencing the market production and the industry is considered to be highly competitive. Concentration within an industry can be defined as the degree at which a small number of firms make up for the total production in the market. To understand market concentration, let’s first understand ‘concentration’. If the top firms keep on gaining market share, then we say that the industry has become highly concentrated. The value of top firms or top ‘n’ firms may be three or maximum five. It could be sales, employment statistics, number of people using a company’s services, number of outlets etc. ‘Market Share’ is used as a reference here in the formulae. The market concentration ratio is measured by the concentration ratio.ĭescription: The market concentration ratio measures the combined market share of all the top firms in the industry.

It measures the extent of domination of sales by one or more firms in a particular market.

Definition: Market concentration is used when smaller firms account for large percentage of the total market.

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