Monopoly Measurements

In Intermediate Public Economics by Hindriks and Myles (2004) there is a comparison chart of the market concentration in US manufacturing (1987) using the 4-firm concentration ratio and the Herfindahl index (p227). I am thinking of a deviation from perfect competition that the 4-firm concentration ratio can illustration. In perfect competition, the proportion of a market that a firm would control would be equal to the 1/n, where n = the number of firms in the market. Thus in Laundry Manufacturing, there are 11 firms and the 4-firm concentration is 0.93, which looks pretty bad. It's clearly an example of imperfect competition. On the other hand, Book Publishing has a 4-firm concentration of 0.24., which whilst still a far cry from perfect competition, doesn't quite look as bad. Except there are 2182 published.

The ratio of four Laundry Machine manufactures to the total industry is 4/11 or 0.36, which would be their share under perfect competition. Instead it is 0.93 which is variation of 0.93-0.36 = 0.57.

In comparison the ratio of four Book Publishes to the total industry is 4/2182 or 0.0018, which would be their share under perfect competition. Instead it is 0.24 which is variation of 0.24-0.0018 = 0.24 (rounded).

Whilst Laundry Machines are still more monopolistic than Book Publishing when one takes into account the total number of firms a different picture arises than what one would witness under just 4-firm concentration alone. Of course, if there were only four firms in an industry this would mean a concentration of 1.00, which would look very much like a monopoly! And indeed it very well might be with the concentration resulting from very limited contestability and a high level of collusiveness - all of which is bad for aggregate productivity and economic welfare.

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