Herfindahl and N firm ratio

Hi all, I am really confused with the interpretation. What does it mean? What does the word ‘concentration’ means in this context- a high concentration is competitive or monopoly? Thanks for illuminating me. S

High concentration means high index value, with monopolist having the highest index. If HHI is less than 1000 (or 0.10) it is very competitive, i.e., many firms. If you get HHI = 0.0645, you can tell there are about 16 firms in this indutry., and since HHI <0.10 it is competitive.

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Concentration is related to competition, and economics tells us there is more competition if there are more firms in the market, and when their market shares are small (less pricing power). So since the indexes are both positively related to market shares of firms in the industry, a higher index value means there is more concentration, and thus less competition.

Concentration in layman terms means that amount of market power firms in an industry have. If there is very high concentration in industry, it means firm(in that industry) is a monopoly. Example: Microsoft have near monopoly in computer softer ware, so for this industry the market power is almost concentrated in hands of only one firm. Example: soft drinks industry, have a high concentration, but the concentration in divided among few firms. So this means that this industry have a market structure of oligopoly. High concentration (monopoly)__________low concentration(perfectcompletion)

Thanks guys, spirit good explanation mate. helped a lot.

How many firms in industry with HHI=0.123, and is it competitive?

Equivalent equal-sized firms = 1/HHI = 1/0.123 = 8.13 Since HHI<0.18 i would say it is a moderatly competitive industry.

about 8 and I believe >.1 is considered oligopoly

thats right .18 is the cutoff, my apologies.