IAS Economy Practice Question . 16

In economy, what is generally measured by calculating concentration ratios?
[C]Production Capacity
[D]Geographical Coverage by suppliers

Answer: Competition
Competition is generally measured by calculating concentration ratios. Concentration ratios indicate whether an industry consists of a few large firms or many small firms. Two of the most commonly used metrics are the Herfindahl Hirschman Index (HHI) and the N-firm concentration ratio. Herfindahl Hirschman Index: Under the HHI, the market share of each firm in a relevant sector is squared and added to arrive at a statistical measure of concentration. The value of the index varies from close to 0, indicating nearly perfect competition, to 10,000, indicating the presence of just one firm, a monopoly. HHI = s1 2 + s2 2 +s 3 2+ … + sn 2 (Where sn is the market share of the nth firm, and s varies from close to zero to 100). N-firm concentration ratio: This method measures the dominance of the biggest firms in a particular sector. N in this case is the number of firms being considered. A four-firm concentration ratio, for instance, would just sum up the market shares of the four biggest firms in the market. Fewer firms having a large market share would indicate less competition.

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