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# Herfindahl index

Find the Herfindahl index for an industry composed of (a) three firms - one with 70 percent of the market, and the other two with 20 and 10 percent of the market respectively (b) one firm with 50 percent share of the market and 10 other equal sized firms (c) 10 equal sized firms.

Since under price leadership by the dominant firm, the firms in the industry following the leader behave as perfect competitors or price takers by always producing where the price set by the leader equals the sum of their marginal cost curves the following break even in the long run. True or False? Explain.

#### Solution Preview

Herfindahl-Hirschman Index (HHI) measures of the size of firms in relationship to the industry. It is an indicator of the competitiveness in the industry. It is calculated by summing the squares of the market share of each firm. So you would calculate:

70^2 + 20^ 2 + 10^2 = 4900 + 400 + 100 = 5400

50^2 + 10* 5^2 = 2500 + 10 * 25 = 5000

10 * 10^2 = 10 ...

#### Solution Summary

Herfindahl index calculation and price leadership concepts

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