What advantages does a herfindahl-type index have as a measure of Essay

What advantages does a herfindahl-type index have as a euphony of industrial niggardness over an n firm concentration ratio - Essay ExampleThere are two main differences of the Herfindahl index with the concentration ratio. The Herfindahl index uses all the firms market shares rather than using every particular number of the largest firms and furthermore, it uses the squares of the values of the market shares to compute the extent of concentration. So,if we assume N firms in the industry, the Herfindahl index looks likeTo identify the relative advantages of the Herfindahl type index it is pertinent to note the desirable properties such competitiveness indices should endanger. First, any competitiveness index should give a decreasing trend with a rising number of firms. This is simply a reflection of the fact that as the number of firms change magnitudes the competitiveness rises and hence any index that captures the extent of concentration in the industry should reduce in value (Tirole, 1988). Secondly, any index of concentration should also be non-increasing if not declining with an increase in the extent of symmetry in the market shares of the associated firms (Tirole, 1988). Thus, having perceived the basic features any adequate index of concentration should have, we now proceed to comparatively give way the two aforementioned measures in the extents they meet up to these requirements.Evidently, the concentration ratio as well as the Herfindahl index both satisfies the first requirement. Both of the indices shall exhibit declining trends as the number of firms start rising since the individual market shares as a percentage of the total market output shall fall. However, the concentration ratio fails to see the second requirement. If there was a redistribution of market shares among the considered firms with some of them gaining higher market shares while that of the others fell so that the total market share of these firms taken in concert remained th e same, the concentration ratio would not change. However, in the Herfindahl index, the squared values of the individual market