Similarities and Differences between the CR and HHI as an Indicator of Market Concentration and Market Power

Abstract

Market concentration can be measured in different ways, i.e. by using different indicators. In the broadest use are the concentration ratio (CR) and Herfindahl-Hirschman Index (HHI). Concentration ratio of market concentration is usually measured as the sum of the market shares of four, eight or twelve largest companies in an industry. Herfindahl-Hirschman index of market concentration is expressed as the sum of squared market shares of all firms in an industry. It is believed that the Herfindahl-Hirschman Index is more precise measure because it takes into account all companies. Research on the example of the US economy shows that there is no difference between the concentration ratio and the Herfindahl-Hirschman index, i.e. it shows that there is a specific relationship between them. This relationship allows the conversion of a certain value of one indicator in the corresponding value of the other indicator and drawing conclusions as well as on the basis of indicator from which it was derived.

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