Extra Credit The Herfindahl index for a perfect monopolist (market share = 100%) is: ? 100. ? 10,000. ? 100,000. ? 10.
The Correct Answer and Explanation is:
The correct answer is 10,000.
Explanation:
The Herfindahl-Hirschman Index (HHI) is a measure of market concentration, which is used to assess the degree of competition within an industry. The formula for the HHI is:HHI=∑i=1N(Si)2HHI = \sum_{i=1}^{N} (S_i)^2HHI=i=1∑N(Si)2
where:
- SiS_iSi is the market share of firm iii, and
- NNN is the total number of firms in the market.
The market share SiS_iSi is expressed as a percentage of the total market, so when you square the market share, the value is in percentage terms squared. The HHI can range from 0 (perfect competition) to 10,000 (a pure monopoly).
For a perfect monopolist, the market share is 100%. In this case, the HHI would be calculated as:HHI=(100)2=10,000HHI = (100)^2 = 10,000HHI=(100)2=10,000
This value of 10,000 indicates that the market is completely dominated by a single firm, meaning there is no competition.
- For a perfectly competitive market, the HHI would approach 0, as many firms each have a very small market share.
- For a market with moderate concentration, the HHI would be somewhere in between, depending on how the market shares are distributed.
In practice, an HHI:
- Below 1,500 is considered a low-concentration market (competitive),
- Between 1,500 and 2,500 is considered moderately concentrated,
- Above 2,500 is considered highly concentrated.
Thus, for a perfect monopoly, the Herfindahl-Hirschman Index is 10,000, which signifies the highest possible market concentration.
