AP_Krugman_Textbook

four- and eight-firm concentration ratios are the most commonly used. A

higher concentration ratio signals a market is more concentrated and thus is

more likely to be an oligopoly.

Another measure of market concentration is the Herfindahl-

Hirschman index, or HHI. The HHI for an industry is the square of each

firm’s share of market sales summed over the firms in the industry. Unlike

concentration ratios, the HHI takes into account the distribution of mar-

ket sales among the top firms by squaring each firm’s market share,

thereby giving more weight to larger firms. For example, if an industry

contains only 3 firms and their market shares are 60%, 25%, and 15%, then

the HHI for the industry is:

HHI= 602 + 252 + 152 =4,450

By squaring each market share, the HHI calculation produces numbers that are

much larger when a larger share of an industry output is dominated by fewer firms.

This is confirmed by the data in Table 57.1. Here, the indices for industries dominated

by a small number of firms, like the personal computer operating systems industry or

the wide-body aircraft industry, are many times larger than the index for the retail gro-

cery industry, which has numerous firms of approximately equal size.

574 section 10 Behind the Supply Curve: Profit, Production, and Costs

The HHI for Some Oligopolistic Industries

Industry HHI Largest firms

PC operating systems 9,182 Microsoft, Linux

Wide-body aircraft 5,098 Boeing, Airbus

Diamond mining 2,338 De Beers, Alrosa, Rio Tinto

Automobiles 1,432 GM, Ford, Chrysler, Toyota, Honda, Nissan, VW

Movie distributors 1,096 Buena Vista, Sony Pictures, 20th Century Fox, Warner Bros., Universal, Paramount, Lionsgate

Internet service providers 750 SBC, Comcast, AOL, Verizon, Road Runner, Earthlink, Charter, Qwest

Retail grocers 321 Walmart, Kroger, Sears, Target, Costco, Walgreens, Ahold, Albertsons

Sources:Canadian Government; Diamond Facts 2006; http://www.w3counter.com; Planet retail; Autodata; Reuters; ISP Planet; Swivel. Data cover 2006 – 2007.

table57.1

Courtesy of Henry M. Trotter

Understanding Monopolistic Competition

Leo manages the Wonderful Wok stand in the food court of a big shopping mall. He

offers the only Chinese food there, but there are more than a dozen alternatives, from

Bodacious Burgers to Pizza Paradise. When deciding what to charge for a meal, Leo

knows that he must take those alternatives into account: even people who normally

prefer stir-fry won’t order a $15 lunch from Leo when they can get a burger, fries, and

drink for $4.

But Leo also knows that he won’t lose all his business even if his lunches cost a bit

more than the alternatives. Chinese food isn’t the same thing as burgers or pizza.

Some people will really be in the mood for Chinese that day, and they will buy from

Leo even if they could have dined more cheaply on burgers. Of course, the reverse is

also true: even if Chinese is a bit cheaper, some people will choose burgers instead. In

other words, Leo does have some market power: he has someability to set his own price.

So how would you describe Leo’s situation? He definitely isn’t a price-taker, so

he isn’t in a situation of perfect competition. But you wouldn’t exactly call him a