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Concentration Indices - Research Paper Example

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Concentration indices are useful ways to analyze scenarios which deal with quantitative analysis of the specific subjects be it economic market concentration or health equality analysis. Any concentration index is defined with respect to its concentration curve which usually is two dimensional curve having two coordinates of (x, y) as its main parameters…
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Concentration Indices
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Concentration Indices

This index also shows the amount of competition present among the companies. Basically it takes market shares in account and calculates the sum of shares of the market shares of all the companies present in that particular industry. So if there are N firms in an industry, the HHI is calculated as
Where s is the market share of the firm and 'n' represents the number of the firms in the whole industry. If we see a decrease in HHI index we can say that there is an increase in competition and there has been a loss of pricing power and it's vice versa when there is an increase in the value. Other significant variants which typically revolve around the value of HHI are unconcentrated index which is indicated when H index is below 1000. HHI index between 1000 and 1800 indicates moderate concentration value and HHI index above 1800 indicates high concentration
Concentration Ration is defined as the percentage of market share which is owned by N largest firms in an industry. Usually the value of N is 4 but sometimes some other larger number is taken. It is expressed as CRn, so a concentration ration for N largest firms in an industry is defined as follows
Where s defines the market share of the firm and n defines the number of the large firms if the value of the index is near zero then we can say that the industry is extremely competitive. However as general thumb rule followed by the industry analysts, that if CR value is lower then 40 then it implies that the industry has very stiff competition among the firms present in them and that none of them have a major chunk of market share in them. While on the other scenario where the value is close to 95 then we can say that one firm which is dominating the whole scenario. It can be called a monopolistic scenario.
Lerner Index:
This index value considers the market positioning of the firm. It talks about the pricing and measures the extent to which a given firm's prices exceed marginal costs. Basically it is measured as the difference between the price and the marginal cost of the goods and it is defined as

One thing we need to understand is that a high index value does not indicate the firm's exercising market power. Prices may exceed marginal costs
Gini Coefficient:
One of the most famous indexes is the gini coefficient; it is termed as a measure of inequality of a distribution. It is defined as the ratio of areas on the Lorenz curve If the area between the line of perfect equality and Lorenz curve is M, and the area under the Lorenz curve is N, then we can say that the Gini coefficient is M/(M+N). we can say that this index is used as health inequality or finance related inequality metrics. It is termed between 0 and 1 where if it becomes 0 it is termed as perfect income or health equality. And 1 related to perfect inequality. A practical value usually lies in between them.
Costs and Benefits of the Indices
There are benefits and advantages of some of the indices and some issues with others. If we look at HHI index we can say that it is a costly proposition. It considers all the firms in one single industry and if suppose the industry has 10000 firms under its belt then taking the considerations of 10000 ... Read More
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