The higher the Herfindahl-Hirschman Index, the more firms there are in a market. True False
The correct answer and explanation is:
The correct answer is False.
The Herfindahl-Hirschman Index (HHI) is a measure of market concentration. It calculates the sum of the squares of the market shares of all firms in a market. The HHI is used to assess how competitive or concentrated a market is. A higher HHI indicates a more concentrated market, meaning a few firms dominate the market. In contrast, a lower HHI suggests more competition with many smaller firms.
To clarify, a market with only a few firms having large market shares will have a high HHI. For instance, if a market is dominated by just a few large firms, each with a significant share of the market, the HHI will be high. On the other hand, a market with many firms, each holding a small share of the market, will result in a lower HHI.
For example, if a market has one firm with 80% of the market share and another with 20%, the HHI will be calculated as: HHI=(802)+(202)=6400+400=6800HHI = (80^2) + (20^2) = 6400 + 400 = 6800
This value is quite high, reflecting the dominance of the two firms. However, in a competitive market with many firms, where each has a much smaller market share, the HHI will be lower.
In conclusion, the Herfindahl-Hirschman Index does not measure the number of firms directly; instead, it reflects how much market share is concentrated within the few largest firms. Therefore, a higher HHI means fewer firms are dominating the market, not more.