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12 Price and output determination under Oligopoly

12 Price and output determination under Oligopoly - Price...

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Price and output determination under Oligopoly: 1. Concentration ratios: It’s a measure of mkt power. It is the ratio of total sales of leading firms in an industry (usually 4) to the industry's total sales. These ratios identify oligopoly. However, these ratios some times can be misleading as they do not include cross elasticities, imports and the secondhand markets. Eg: if in US imports are taken into account in automobiles, it will change the concentration. Fewer numbers of firms in an industry = more concentration. 2. Herfindahl-Hirschman index (HHI): It is a measure of industry concentration. It is the sum of squares of mkt share by each firm in the industry. HHI = (S 1 ) 2 + (S 2 ) 2 +……… (S n ) 2 assuming n firms. (S 1 ) 2 = the square of the % mkt share of the leading firm and so on. 3. Concentration ratio vs. HHI If in an industry the leading firm mkt share is 25% and the next big firm has mkt share of 10%, the concentration ration of the leading firm contributes 2.5 times more to the concentration ratio than the next leading firm. In the other hand in HHI since we square the mkt share, the leading firm contributes 625/100 i.e. 6.5 times more to HHI than the second firm.
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