In order to determine if an industry is dominated by a pure monopoly, the Herfindahl index is a better measure. Group of answer choices True False
The Correct Answer and Explanation is:
True.
The Herfindahl-Hirschman Index (HHI) is indeed a better measure for determining if an industry is dominated by a pure monopoly. This index is used to assess the level of market concentration and is particularly useful in identifying the degree of monopoly power within an industry.
The Herfindahl index is calculated by summing the squares of the market shares of all firms within a market. The formula is:HHI=∑i=1N(Si)2HHI = \sum_{i=1}^{N} (S_i)^2HHI=i=1∑N(Si)2
Where SiS_iSi represents the market share of the iii-th firm, and NNN is the total number of firms in the market. The index typically ranges from 0 to 10,000, where:
- An HHI of 0 indicates a perfectly competitive market with no firm holding any market power (i.e., all firms have equal market share).
- An HHI of 10,000 indicates a pure monopoly where a single firm dominates the entire market.
When analyzing a market’s structure, the higher the HHI, the more concentrated the market, and the greater the market power held by a few or a single firm. If an HHI is close to 10,000, it strongly suggests that a monopoly exists or that the market is highly concentrated with very few firms controlling the majority of the market share.
Compared to other measures, such as concentration ratios (CR), which simply look at the market share of the top firms, the Herfindahl index is more sensitive to changes in the distribution of market shares. It accounts for all firms in the market, regardless of their size, and places more weight on firms with larger market shares. This makes it a more precise tool for identifying whether a market is dominated by a monopoly.
Thus, when you want to assess monopoly power, the HHI is the preferred and more comprehensive indicator.
