# Herfindahl index/

Which of the following concentration ratios are most likely to be associated with a perfectly competitive industry? Four-firm concentration ratio Herfindahl-Hirschman Index A) 125 1,000 B) 25 100 C) 85 25 D) 90 2,000 Your answer: C was incorrect. The correct answer was B) 25 100 The four-firm concentration ratio can range from zero to 100 percent. The Herfindahl-Hirschman Index has a theoretical range of near zero to 10,000. As the level of competition increases, the value of either of the concentration measures decreases. A perfectly competitive market is a market characterized by relatively low concentration measures. ----------------------------------------------- from Qbank answer: “The Herfindahl-Hirschman Index has a theoretical range of near zero to 10,000” From CFAI book pg. 138 “The Herfindahl index has a value that is always smaller than one” WHICH ONE IS RIGHT!!!

it depends what you are squaring let’s say 100% or 1, 100^2=10000 1^1=1

Yeah I read that today. I’d go with CFA, HHI is always smaller than 1. 0 to .1 is highly concentrated .1 to .16 is moderately concentrated .16 and greater is low concentration and characteristic of oligopoly or monopoly To find out the equivalent # of firms in the industry you take the 1 over the HHI

My answer was B. Four firms each with an equal market share.

It wouldn’t be four firms with equal market share of 25% under 4 firm ratio. It would be the highest four firms have a combined market share of 25%… would it not?

Reggie you are correct, from the book: “One method is the N firm concentration ratio: the combined market share of the largest N firms in the industry”

both CFA and Shweser are correct, CFA takes the decimal percntage and Schweser using absolute percntage thus for CFA, calculation would 0.2 for a 20% market share in Schweser, they should both give the same answer. 25% is the combined market share for the four biggest companies

reggie your confusing the 4 firm concentration with the equivalent firms 4 firm ratio is just the sum of the 4 biggest firms market share. equivalent firms is the reciprocal of the herfindahl index

Yeah my first post was only about the HHI, i can see how that last sentence can sounds like i’m talking about the N concentration

Note that there are 2 Herfindahl indexs discussed in the cfa books - economics talks about the Herfindahl-Hirschman Index (HHI) which is the above calculation. The Equity / FI book discusses the Herfindahl Index - using the decimal percentage figures - therefore always giving a result between 0 and 1

I forgot why the HHI is squared. For example an HHI of 100% becomes 10,000 which is the largest value the HHI can take. But what’s the purpose of squaring it?

To magnify the effect of the firms with larger market share. chad17 Wrote: ------------------------------------------------------- > I forgot why the HHI is squared. For example an > HHI of 100% becomes 10,000 which is the largest > value the HHI can take. But what’s the purpose of > squaring it?