Measuring Market Power
Concentration ratios are the most common measures of market power. The four-firm concentration ratio measures the percentage of total industry output attributable to the top four companies. For monopolies the four firm ratio is 100 per cent while the ratio is zero for perfect competition. Another measure of concentration is the Herfindahl-Hirschman Index (HHI) which is calculated by "summing the squares of the percentage market shares of all participants in the market." The HHI index for perfect competition is zero; for monopoly, 10,000. The four firm concentration domestic (U.S) ratios for cigarettes is 93%; for automobiles, 84% and for beer, 85%.
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