Q. If we decide to measure market power via simple measures such as N firm concentration ratio or Herfindahl-Hirschman Index (HHI), We would prefer:
A. HHI
B. N firm concentration ratio
C. Indifferent between the two.
Answer is option A.
Kindly explain me why A is correct?
I marked option B as the answer because I thought in case of measurement market power option B would prefer and in case of mergers among the top firms option A would prefer.
HHI is preferred method over N firm, because HHI considers the effect of merger/ demerger, but N does not consider it.
HHI considers the square of the sum of the individual market shares. The advantage of using HHI is to solve an issue that arises in using N Firm concentration ratio as it considers the sum of the individual market shares due to which it fails to consider the impact of mergers. HHI Solves that issue.