Oligopoly 357Newspapers are a dramatic case in point. Based on CR 4 , the newspaper industry
would seem to be effectively competitive for the United States as a whole. But for
most major cities, one or two firms account for nearly 100 percent of circulation.^3
Second, the census data exclude imports—a serious omission considering
that the importance of imports in the U.S. economy has risen steadily (to some
13 percent of GDP today). In many industries (automobiles, televisions, elec-
tronics), the degree of concentration for U.S. sales(including imports) is much
less than the concentration for U.S. production.Thus, many industries are far
more competitive than domestic concentration ratios would indicate.
Finally, using a concentration ratio is not the only way to measure market
dominance by a small number of firms. An alternative and widely used measure
is the Herfindahl-Hirschman Index (HHI), defined as the sum of the squared
market shares of all firms:where s 1 denotes the market share of firm 1 and n denotes the number of firms.
For instance, if a market is supplied by five firms with market shares of 40, 30, 16,
10, and 4 percent, respectively, HHI 402 302 162 102 42 2,872. The
HHI index ranges between 10,000 for a pure monopolist (with 100 percent of the
market) to zero for an infinite number of small firms. If a market is shared equally
by n firms, HHI is the n-fold sum of (100/n)^2 , or (n)(100/n)^2 10,000/n. If the
market has 5 identical firms, HHI 2,000; if it has 10 identical firms, HHI 1,000.
The Herfindahl-Hirschman Index has a number of noteworthy properties:- The index counts the market shares of all firms, not merely the top
four or eight. - The more unequal the market shares of a collection of firms, the
greater is the index because shares are squared. - Other things being equal, the more numerous the firms, the lower is
the index.
Because of these properties, the HHI has advantages over concentration ratios;
indeed, the HHI is used as one factor in the Department of Justice’s Merger
Guidelines. (Under antitrust laws, the government can block a proposed
merger if it will substantially reduce competition or tend to create a monopoly.)
Concentration ratios and the HHI are highly correlated. Because they are avail-
able more readily (and easier to compute), concentration ratios are quoted
more widely.HHIs 12 s 22 ... sn^2(^3) The Bureau of the Census presents concentration ratios starting for broad industry categories
and progressing to narrower and narrower groups (so-called six-digit categories). The categories
in Table 9.1 are at the five- and six-digit levels. As we would expect, concentration tends to increase
as markets are defined more narrowly. Many researchers believe that five-digit categories best
approximate actual market boundaries.
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