Traditional theory suggests that concentrated industries are more likely to sustain economic profits. The Federal Trade Commission has concluded, however, that a single firm's market share is quite often the best predictor of its profits, regardless of concentration in the industry as a whole. The Federal Trade Commission suggests that, on the average, each 10 percent rise in market share yields a 2 percent increase in profitability.

 

            This evidence shifted the attention of the Justice Department's Antitrust Division to the Herfindahl-Hirschman Index (HHI) which estimates concentration by emphasizing the firms with the largest market shares, as measured by the formula:

           

where Si is the market share of the ith firm. The HHI places the greatest weight on the largest firms by squaring market shares.

 

            Notice the stress on an industry’s biggest firms squaring mark.  The lone firm in a monopolized industry would have a market share S1= 100 percent, and the HHI= 1002= 10,000. If, on the other hand, 100 firms each control 1 percent of sales, then the HHI would be 100. Thus, the HHI falls as the number of firms in an industry rises or as firms' sizes become more uniform. Consider a market where four firms have 20 percent each and 20 firms have 1 percent each, and a second market where one firm has 77 percent and 23 firms each have 1 percent. Four-firm concentration ratios in both industries would be 80 percent, but the HHI paints a different picture; 1,620 and 5,952, respectively. HHIs capture differences in concentration hidden by concentration ratios alone.  Note that HHIs are also listed back in Table 1.

 

TABLE ONE MISSING!!!! (macro 12- total 27)