# Herfindahl index vs n-Firm

Does anyone else remember this question? No calculations, all conceptual. I don’t remember anything else about it, just that I totally guessed.

Whether HI was a) a more intuitive measure of competition, and b) open to more bias. Something like that.

a) more intuitive b) more discriminatory I chose a - no; b- yes

i put yes no

The HI is a less intuitive measure but gives you a greater level of discrimination.

Can someone please explain this? I dont remember which choice I picked but still how is HI more discriminatory than intuitive?

HI can give you a wide range of number… but if I tell you the index is 500, do you know what the means immediately? Probably not. But if I say the top 4 firms are 80% of the industry, you probably get that. As for discrimination… it means there are more points in the index. While the 4 firm number goes from 0-100, the HI goes from zero to in the thousands… more points along the way… more increments to differentiate two industries.

i wasn’t really sure what discriminatory meant in that context but i assumed (incorrectly it seems) that HI was less discriminatory bc it includes more firms in the calculation.

I put No-No

NO - YES

no, yes, in agreement with mcf’s explanation

Answer is No, Yes. HI is less intuitive while more discrematory. mcf explained it rightly.

i would think H.I Index as an indicator of competition , so answer should be yes no COULD ANY GURUS answer this correctly plz. from earlier post i can very well imagine that exam was very conceptual

mcf has it right regarding intuition, but not quite with herfindahl. I’d explain the “discriminatory” part of the question with an example. Industry A has 5 firms with 20% market share each. Industry B has 1 firm with 70% market share, and 10 with 3% each. If you use a 4 firm concentration ratio, then industry A comes out at 80%, where as industry B comes out at 79%. But industry B is clearly more concentrated - Herfindahl gets you the “right” answer here of 4990 for industry B vs 2000 for A. That makes it more “discriminatory” - although it’s a really crap way of asking a question.

I will be appearing for this exam in dec and i thought i had mastered this chapter.However, after reading this post i am very much demotivated. I would really appriciate if some one could tell me first what intutive and descrimination means. Then the meaning in terms of HI. As for my studies. I am just referring to Schwser and have no background in finance. Please give me good advice. May God bless you all.

It’s a lousy word choice, but this is about discriminant measures (like in stats) 4 firm can not discriminate between the two in Chris’s example. It does not have discriminant validity in his example. But HI is not intuitivate, what does the final number mean by itself?

With some very clear responses I’m surprised this got revived a month after the fact… It was basically a gimme question on the exam if you knew were familiar with the Herfindahl Index. Both are measures of industry concentration… as to the particular question Intuitive - Ease of understanding # Firm Concentration Ratio is about as intuitive as it gets. This number of firms makes up this percentage of the industry. If you just gave someone a Herfindahl number it has no meaning. Discriminatory - Precision If there are 2 major firms (duopoly) in an industry it is more concentrated than an industry with 4 major players. Imagine market shares of the top 4 firms as: ex1. 60 | 25 | 5 | 5 ex2. 25 | 25 | 25 | 20 both industries will have a 4 firm concentration ratio of 95%, but the Herfindahl index differentiates between the two by using the squares of the market share. As an industry concetration decreases from a pure monopoly (1 firm, 100% market share) its HI exponentially decreases.

Thanx dear. I take this as an official answer and will memorize.