Measures of Industry Concentration

The most common measures of industry concentration are the CR4, CR8 and HHI. The four-firm Concentration Ratio (CR4) is the share of industry sales accounted for by the four largest firms. The eight-firm Concentration Ratio (CR8) is the share of industry sales accounted for by the eight largest firms. The Herfinhahl-Hirschman Index (HHI) equals the sum of the squared market shares of each firm in the industry. Note that this index is a function of all firms’ market shares. HHI has lower limit zero in case of perfect competition (firms→∞ and shares→0) and upper limit 10000 in case of monopoly (1 firm with share 100).

Example: An industry has nine firms with the following market shares: 25, 20, 15, 10, 8, 7, 6, 5 and 4. CR4 = 25 + 20 + 15 + 10 = 70, CR8 = 25 + 20 + 15 + 10 + 8 + 7 + 6 + 5 = 96 and HHI = 625 + 400 + 225 + 100 + 64 + 49 + 36 + 25 + 16 = 1540