Industry Concentration

Chris Lavery

Research Project:

Industry Concentration

Industry concentration has two forms of measurement. The first is based upon a 100% concentration of all the firms in a certain industry. This is known as the concentration ratio and represents the value of the top firms of an industry stated as a percent of the total industry scales. The other type of concentration measurement is known as the Herfindahl index and is calculated by squaring the individual producers percentage of the market and adding them together. For instance, if there were 5 firms in an industry and they each had 20% of the total output, the Herfindahl index would be; (20 squared) + (20 squared) + (20 squared) + (20 squared) + (20 squared)= 2000. An example of these concentration ratios, taken from the 1997 US government economic census, are as follows:

4-Firm Concentration Ratio Herfindahl Index

Meat products: 35 393

Fruit and vegetable canning: 24 259

Breakfast cereal: 82 2,445

Women's and and misses' dresses: 13 76

Book printing: 32 364

Stationery: 56 1,128

Soap and detergent: 66 1,619

Men's footwear: 50 857

Women's footwear: 50 795

Bolts, nuts, rivets, washers: 9 40

Electronic computer: 45 728

Radio, TV, wireless broadcasting: 49 972

Burial caskets: 74 2,965

Generally, if the 4-firm concentration ratio is high, the Herfindahl index will be high as well.

2002 4-Firm Concentration Ratios for 3 Major Industries: Utilities, Accommodation and Food Services, and Finance/Insurance

Utilities

4-Firm Concentration Ratio

Electric power generation, transmission, & distribution 18.1

Natural gas distribution 18.6

Water, sewage, & other systems 34.9

Hydroelectric power generation 65.6

Fossil fuel electric power generation 33.9

Nuclear electric power generation 62.8

Sewage treatment facilities 35.9

Water supply & irrigation systems 39.9

Steam & air-conditioning supply 72.9

Source: http://factfinder.census.gov/servlet/IBQTable?_bm=y&-geo_id=D&-ds_name=EC0222I4&-_lang=en

Accommodation and Food Services

4-Firm Concentration Ratio

Accommodation 16.9

Traveler accommodation 17.5

Hotels (except casino hotels) & motels 22.0

Casino hotels 43.8

RV (recreational